Working Paper: CEPR ID: DP3515
Authors: Dalia Marin; Andzelika Lorentowicz; Alexander Raubold
Abstract: The Paper takes a first look at the host and home country effects of German foreign direct investment (FDI) in Eastern Europe based on new survey data of 1050 investment projects in Eastern Europe by 420 German multinationals during the 1990s. We find that German investors transfer a substantial amount of financial capital to Eastern Europe. Furthermore, the most dynamic and innovative segment of the German economy invests in the East which explains why single owned firms dominate as the form of control. We also find strong evidence for vertical FDI suggesting that German corporations are outsourcing a substantial share of their production to Eastern European affiliates to exploit lower wages in the East.
Keywords: capital flows; corporate governance; eastern enlargement; globalization; vertical versus horizontal FDI
JEL Codes: F15; F21; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic conditions in Eastern Europe (P29) | Volume of capital transferred (F21) |
| Economic incentives (M52) | Increased FDI (F21) |
| Dynamic and innovative characteristics of German firms (O31) | Investment decisions (G11) |
| Desire to exploit lower wages in Eastern Europe (F16) | Decision to outsource production (L23) |