Determinants of FDI in transition countries and estimation of the potential level of Croatian FDI

Abstract

In a global economy, foreign direct investment (FDI) represents the main form of international business activities. More than the mere cross-border movement of capital, FDI includes transfer of technology and know-how, thus contributing to competitiveness, employment and trade, and consequently, economic growth and the development of the local economy. The recent drop in international capital flows resulting from global financial and economic crisis has caused concerns regarding growth prospects for the world economy in general and that of less advanced transition countries in particular. By hypothesizing that Croatia, as the next member of the EU, has realized sub-optimal effects in attracting FDI, and that international competition in this field is expected to grow further, the aim of the paper is to find out determining factors behind inward FDI to transition countries, in order to detect the capacities of Croatia in hosting new foreign investment. Statistical analysis, focusing on bilateral FDI-flows and country-specific characteristics, proved the importance of typical â€Ygravityâ€?-type variables, as well as those based on increasing returns to scale, while showing that at present Croatia has exhausted its potentials in hosting new FDI.