Foreign Direct Investment and Government Policy in Central and Eastern Europe

The 1990s have been a period of extraordinary politics in Central and Eastern Europe (CEE). This chapter discusses how the transition from state to market has created bureaucratic barriers to entry, but also windows of opportunity for foreign direct investment (FDI). The high costs and high investment risks associated with FDI in CEE are a reflection the institutional development. Thus, inflows of FDI have been largest in those countries that made most progress in establishing a market-oriented institutional framework. After outlining trends of institutional change and their impact on FDI, this chapter discusses how aspects of the institutional framework and FDI policy affect diverse types of investment projects. Acquisition and Greenfield investors are concerned with different aspects of government policy: privatization and regulatory policies for acquirers and investment incentives, regional policy and special economic zones for Greenfield investors. The shifting policy priorities have thus changed the types of projects undertaken by foreign investors in the region.