REGIONAL COOPERATION AND ECONOMIC INTEGRATION

PART V:
(macroeconomic stability and openness of the economy), non-economic factors, such as
governance, agglomeration effect and the effect of EU accession on EU FDI outward stock
per capita in the EU candidate countries.
GDP per capita serves as a measure of market size. The size of the market is an important
factor for attracting FDI flows. However, Botric and Skuflic (2005) have found out that the
size of the market does not have a significant impact on the FDI flows to the South-Eastern
European countries.
Labour costs are another important FDI determinant. Cheap labour is of particular interest
for the EU-27 countries which wage levels are high and which companies look for reduction
of costs by relocating production to countries where resources are available at a lower cost.
Therefore, there could be also a positive correlation between FDI and labour costs.
Foreign investors should be concerned not only with the labour costs, but also with the
quality of labour, since high sill workers can learn and implement new technology and the
training costs would be in that case considerably lower
Availability of good infrastructure is a necessary condition for any type of FDI. Among the
several candidates for the infrastructure variable we have chosen the number of mobile cellular
subscriptions per 100 people.
According to the gravity model, proximity to the home country is an important factor for
explaining the trade volumes between countries. Since FDI flows are closely related to trade
flows we can apply the analogous argument for the FDI. Further geographical distance between
the home and host country markets implies higher transportation cots.
We expect that the more FDI from EU will be directed to the EU candidate countries with
larger market size, lower labour cost, higher educated labour force, better infrastructure
and closer to EU.
However, investment decisions are also influenced by economic and political stability. For
the macroeconomic stability, we add the policy variable consumer price index as a measure
of inflation. A track of low inflation is a clear signal to foreign investors how successful the
host country is and thus the prospect of further growth. On the other hand, higher return on
investment boosts FDI and as a result of that the increase of prices of products in which the
foreign investor invested, should be positively correlated to the FDI. Therefore we can not
predetermine the expected sign of inflation rate.
Another important determinant of FDI that can be assessed within the overall economic
policies is the external liberalization. For this, we use the variable trade openness measured
as a ratio of export and import to GDP. According to Basar and Tosunoglu (2005) a country
can attract more FDI if the ratio between the foreign trade (import and export) and GDP
is higher. Other authors, Caves (1996) and Singh and Jun (1996) doubt in the existence of
relation between the FDI and the openness of the economy. For our group of the three EU
candidate countries, we expect the openness of the economy to have positive impact on
FDI flows to the EU candidate countries.
Non-economic factors, such as governance, also influence the decisions of foreign investors. To
assess the governance, we use the variable Euromoney country risk ranking. The better country
ranking implies that the country is more attractive for FDI. Deichman (2001) and Bevan and
Estrin (2000) found a significant positive relationship between the country risk and FDI.
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