The Diffusion Of Innovations In Central And Eastern Europe: A Study Of The Determinants And Impact…

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.