Privatization and FDI in Central and Eastern Europe

Book excerpt: Since economic transition started, a close relationship has developed between privatization and foreign direct investment. It has nevertheless been an unequal relationship: while privatization has undoubtedly dominated foreign-directinvestment inflows, in most Central and Eastern European countries, foreign direct investment has not been the dominant form of privatization, although, according to the findings of a number of previous studies and a recent survey carried out by UNCTAD, foreign direct investment seems to have made a positive contribution to the improvement of efficiency and corporate governance in the framework of economic transition. These findings are particularly important in the light of the expectations that, in the near future, privatization remains the mainstay for an important part of the potential investment inflows of several (but not all) Central and Eastern European countries. At the end of the 1990s, policy makers in the region seem to recognize that not only is privatization important, but also the way it is carried out matters, as restructuring and the establishment of strong corporate governance may be more important than the disposal of former State-owned assets. A strong presence of foreign-owned firms allows a fast restructuring, on condition that, at the same time, host Governments follow sound, efficiency-oriented and internationally competitive economic policies. The impact of privatization-related foreign direct investment depends largely on the follow-up investments and on the restructuring efforts of the new owner. The role of government policies in the future can be seen in maximizing the positive effects and stimulating spillovers to the rest of the economy.