A Knowledge-Capital Model Approach of FDI in Transition Countries

This paper aims at assessing the nature of foreign direct investment (FDI) in transition countries. We provide an empirical application of the knowledge-capital model of multinationals (MNEs) to an original panel of a¢ liates of MNEs in seven transition countries. We succeed in proving that the strategies of MNEs are heterogeneous by looking at FDI ‡ows by sectors of activity and by source countries. We …nd evidence for both horizontal and vertical FDI in the region, while current studies detect only the vertical ones. Therefore, we argue that transition countries start being attractive for foreign investors not only because of their low labor costs, but also because of their market potential. JEL classi…cation: F21, F23 Keywords: Foreign direct investment, Multinationals, Knowledge-capital model, Panel data. Departament d’Economia i Història Econòmica, Edi…ci B, Bellaterra 08193, Barcelona, Spain, phone: +34 93 581 1810, e-mail: [email protected], webpage: http://idea.uab.es/abrindusa yI would like to thank Michael Creel and Rosella Nicolini for their invaluable advice and support. I am also grateful to Joan Farré and Ivo Krznar for help with working with the data. Comments and suggestions from participants at the Macroeconomics Workshop in Universitat Autònoma de Barcelona are gratefully acknowledged. Responsibilities for errors and omissions are my own.