The Effects of Foreign Direct Investments on Transition Economies: The Balkans Case

Abstract

(ProQuest: ... denotes formula omitted.)IntroductionFollowing the painful 90s, stabilized economic growth becomes the predominant objective for most of the Balkans. In this direction, some of the Balkan countries such as Croatia and Bulgaria have managed to get aboard to the European Union (EU) train. But for many others, the train has not arrived yet. Moreover, being a transition economy in the Balkans creates additional burdens to these counties. Having experienced the harsh Bosnian War and the lagged effects of it, those countries are still struggling to find their way into the long road of development.As an international political instrument Foreign Direct Investments (FDIs) are playing an increasingly important role in economic development. By means of FDIs, the host countries may be affected positively through externality effects and capital enhancement (Alfaro, Chanda, Kalemli-Ozcan, and Sayek, 2006; Sun, 2002). However, FDIs can also create adverse effects such as external-dependency and imbalances in local markets. The outcome on the host economies basically depends on the level of absorptive capacities in these countriesi. Thus, the effects of FDIs in host countries with solid administrative, financial and economical infrastructures differ from the effects in countries lack such structures. These structural differences create a long range of effects on the host countries.In this paper, the effects of FDIs on economic growth of transition economies in the Balkans are investigated through an absorptive capacity perspective. The distinction between EU member Balkan countries and non-EU member Balkan countries has been made in the paper with "transition" concept taken into account; since EU members would be expected to have a better absorptive capacity due to EU obligations has to be fulfilled in order to reach EU standards. Thus, this paper concentrates only on non-EU member transition economies in the Balkansii. Accordingly, the FDIs in the host countries that have some level of absorptive capacities may have some effects that accelerate the growth, while, the FDIs in countries that lack such absorptive capacities, may not promote the growth. Moreover, there is a mutual relationship between absorptive capacities and FDIs. On one hand, absorptive capacities can stimulate the effects of FDIs to both positive and negative sides; on the other hand, FDI flows to a country are in line with the absorptive capacity of that country; as the capacity increases the possibility of increased FDI flows arises (Alfaro et al., 2004; Alfaro et al., 2006). Therefore, the absorptive capacities of the host countries are of vital importance when it comes down to FDIs. Through the absorptive capacity perspective the aim of this paper is to empirically reveal to what extent transition economies in the Balkans can utilize FDIs. Given the potential significance of FDIs on economic development, this paper not only offers an overall guideline on the matter for the transition economies in the Balkans but also presents a new technique to measure the absorptive capacities. Through the new technique employed to measure absorptive capacities, the study aims at contributing to the literature.Following the introduction, the FDI movements in Balkans are handled in the second part. In the third part, a comprehensive reasoning for the concept of absorptive capacity and its ties with FDIs takes place along with the empirical analyses applied to the sample. Findings of the analysis are also presented in this part. In the final conclusion part, the results of the analyses have been studied and the paper has been concluded.FDIs in the BalkansThe International Monetary Fund (IMF) listed transition economies in 2000 (International Monetary Fund, 2000). According to this list; Croatia, Bulgaria, Albania and Macedonia were listed as transition economies. Later, the World Bank added Bosnia Herzegovina and then Serbia and Montenegro as transition economies as well in 2002 (The World Bank, 2002). …