The Diffusion Of Innovations In Central And Eastern Europe: A Study Of The Determinants And Impact Of Foreign Direct Investment. by

The diffusion of innovations plays an important role in determining patterns of growth. Foreign direct investment (FDI) is widely thought to be an important channel for the introduction of new ideas, technologies and standards to the transition economies in Central and Eastern Europe. This paper contains a panel data analysis of the factors affecting aggregate inflows of FDI in the ten accession economies plus Croatia over the five year period from 1992 to 1996. Our results indicate that the method of privatisation, the extent of trade linkages with the advanced economies and proximity to the EU have significant effects on the level of investment. We also detect a role for risk and relative labour costs in the host economies, suggesting a degree of competition to attract inward investment. We augment these results with a separate panel data analysis of the factors affecting technical progress in eight Eastern European economies over the same period. This suggests that spillovers from the stock of inward investment and international trade both have a positive impact on productivity in the transition economies, with the beneficial effects of FDI being higher in the more market-orientated economies. June 1998. Earlier versions of this paper were presented at the Institute for World Economics of the Hungarian Academy of Sciences, Budapest, the Royal Economic Society Conference at the University of Warwick, and the University of Leeds. We are grateful to Ray Barrell, Vladimír Benácek, Miroslaw Gronicki, Magdolna Sass, Martin Weale and other seminar participants for helpful comments. The work was supported by an ACE project grant from the European Commission (project number P96-6086-R). National Institute of Economic and Social Research 2 Dean Trench Street Smith Square London SW1P 3HE email: [email protected], [email protected]