The Role of Foreign Direct Investment in Eastern Europe

Private foreign direct investment (FDI) is one of the major instruments to support successful transformation to a market economy in Eastern Europe and to reduce the gap in living standards vis-à-vis the West. New investment in the East is estimated at US$ 7.5 billion for 1994 and 12.5 billion for 1995, bringing up the total stock to US$ 25 billion and 38 billion, respectively. Capital flows have not quite met original expectations with regard to their scope and impact. So far no straightforward correlation can be found between real growth rates and FDI. A possible side-effect may be the abuse of market power created by FDI.