Foreign Direct Investment in Southeast European Countries: The Role of the Service Sector

Abstract

According to economic theory, foreign direct investment (FDI) to developing countries flows to labor-intensive and low-technology production, and between the developed countries mainly toward high-technology production. Identifying the determining factors of FDI is a complex problem that depends on several characteristics specific to countries, sectors, and companies. All of the factors can be grouped into three broad categories: the economic policy of the host country, economic performance, and the attractiveness of the national economy. An important question is how southeast European (SEE) countries can attract higher levels of FDI. This paper uses FDI data for SEE countries, applying the panel data estimation method to determine the main host country determinants of FDI. For SEE countries, FDI inflows largely depend on completing the privatization process. Because privatization in SEE countries was connected to the service sector, and was less successful in the manufacturing sector, our findings suggest that those factors are also relevant for FDI attraction in the period analyzed, 1996-2002.