Effects of Foreign Direct Investment on the Restructuring of the See Economies
Effects of Foreign Direct Investment on the Restructuring of the See Economies

Summary/Abstract: This paper considers the role of foreign direct investment (FDI) in the transformation and development of post-socialist transition economies, with some particular review of the example of Republic of Serbia. Given the post-socialist countries had a significant deficiency of inner capacities, FDI was considered as the most important means of providing financial capital, technologies, organizational and managerial practices and access to foreign capital markets. Such expectations were supported by the theories of positive contribution of FDI to the economic transformation of transition countries. Over the past decade, transition economies have been the fastest-growing host for FDI, but there are not expected results. FDI has not contributed much to the industrial improvement or to the promotion of competitiveness and exports, and the new empirical evidence even points to negative effect of FDI penetration on domestic market. Considering the great disparity between potential and realized effects of FDI on the economic development of these economies, this paper explores the main sources of failure. The first is the type of FDI, with predominating acquisitions and privatizations along with less sophisticated technology transfers; the second refers to the sectoral distribution, primarily in non-tradable services and goods, which means that FDI contributes only to the market spread of the investors. These features of FDI created the mechanisms of disarticulation of host economies, with a decrease in economic growth as a result.

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