ABSTRACT
After the fall of the Berlin Wall and the start of the transition from a centrally planned to a market economy, foreign direct investment (FDI) inflows to Central and Eastern European countries (CEECs) increased substantially throughout the 1990s. This phenomenon has been seen as a beneficial one, since FDI had brought into the countries the financial resources, the new technologies and the know-how necessary for transforming CEECs in successful open market economies. According to the theory, the beneficial impact of FDI on economic performance is more likely when the social capabilities (i.e. education level, technological capabilities, good legal systems, etc.) and absorptive capacity (i.e. capital intensity, skilled labour force, R&D activity) of the host economy exceed a certain threshold (Kokko, 1992). With its well-educated labour force and existing industrial infrastructure, CEECs are believed to have a very good absorptive capacity. Therefore, FDI has been considered as a fundamental ingredient for economic growth and prosperity (Sinn and Weichenrieder, 1997).
