Zdenek Drabek

The Effect of Home‐country and Host‐country Corruption on Foreign Direct Investment

The effect of corruption on FDI is analysed. Using FDI outflows from a sample of East European transition economies that had virtually no outward FDI before 1995, FDI flows are observed based mainly on current investment decisions and less on the inertia of past investments. The model separates the effects of corruption on FDI location decisions and on the amount invested. A linear and negative relationship is found between host‐country corruption and the likelihood of MNCs locating in that country. The relationship between home‐country corruption and FDI is non‐monotonic, with an inverse U shape where both high and low levels of corruption in the home country reducing the probability of outward FDI flows. If FDI is undertaken to a host country, the volume of FDI is affected by home‐country but not by host‐country corruption.

Size of the Public Sector, Contingent Liabilities, and Structural and Cyclical Deficits in the Czech Republic, 1993-1999

Two specialists on fiscal policy in the Czech Republic examine the deterioration of that countrys fiscal position during the late 1990s and outline its causes and consequences. Particular attention is devoted to developments in the government sector, extra-budgetary activities, sources of revenue, patterns of government spending, hidden liabilities, and structural and cyclical fiscal imbalances. The authors also assess in some detail the political environment within which fiscal policy is formulated and describe possible outcomes should the current situation and policies continue. Journal of Economic Literature, Classification Numbers: E50, E60, H50, H60. 7 figures, 13 tables, 21 references.

The Capital Markets in Central Europe

The presence of strong and dynamic capital markets is vital for the inflow of foreign capital and will help domestic companies in seeking additional resources in the form of new equity. The purpose of this paper is to review the development of the capital markets in Central Europe and to identify the major outstanding issues in the link between capital markets and foreign investments. Part I discusses the institutional features of capital markets, as well as their liquidity that affects the entry of foreign investors. Successful privatization and macroeconomic performance also affect the activities on capital markets. The bulk of the report covers the Czech Republic, but also included are Slovakia, Hungary and Poland. Part I reviews the two major institutions of the nonbanking financial sector--investment funds and the stock market, respectively. The main issues of the stock market and the operation of investment funds including regulations, supervision and other institutional features are identified. Part II is divided into three sections and describes the economic factors which are conducive to the creation of capital markets. These factors constitute economic pressure to establish capital markets in the region and are discussed in the first section. The next section identifies the main issues which will be inhibiting the expansion of the capital markets. The last section specifies the main conditions for a more effective functioning of capital markets and offers some policy conclusions.

A Model of Corruption and Foreign Direct Investment a la John Dunning

We model the relationship between foreign direct investment (FDI) and the level of corruption in multinational firms’ (MCNs’) home and host countries. There are two effects of corruption. The first is that host-country corruption reduces FDI by increasing foreign firms’ costs. The second effect, based on John Dunning’s theory that an MNC’s skills reflect its home-country environment, leads MNCs to invest more in countries with corruption levels similar to those of their home country. MNCs develop skills for dealing with home-country corruption, and these skills become a competitive advantage in host countries with similar corruption levels. We test the model using bilateral FDI flows and find that both effects are economically significant.

Effects of WTO Accession on Policymaking in Sovereign States: Lessons from Transition Countries

One of the most remarkable successes of the World Trade Organization (WTO) in recent years has been the expansion of its membership and the continued stream of applications by countries to accede to it. Of the 43 countries that have applied to accede the WTO under Article XII since January 1, 1995, approximately one half are countries in the process of transition from a planned to a market economy. Ten of the 14 countries that have already completed their accession process and between nine and 13 countries — depending on whether East Asian countries are included or not — of the 28 countries negotiating their accession are transition countries. Clearly, the WTO represents a powerful attraction for countries in transition (CITs), which treat WTO Membership as a “stamp of approval” of their policies and their admission into the international community — a feat quite important for CITs that have been isolated from world markets for more than 50 years.