The Impact of FDI in Transition Economies

Foreign Direct Investment (FDI) plays a very important role in economic development. The importance of FDI is even higher for transition countries where domestic capital is incapable of meeting the huge investment needs of the economy in the transformation process from planned to market economy.In the twentieth century international capital flows have taken over the lead from foreign trade, becoming the main power beyond of the world economy. In this context Foreign Direct Investment (FDI) played a crucial role. This role is important too in the modernisation of the emerging countries, as well as transformation of the transition countries from a planned to a market-based economy. Therefore, it should not be surprising why many countries are offering preferential incentives for foreign companies wishing to invest in their countries. This was present especially in the transition countries where preferential incentives were offered by almost each country. The rationale behind this conventional attitude is that FDI (in absence of domestic capital)will speed up the transformation process.