Foreign Direct Investment, Stock Exchange Development, And Economic Growth In Central And Eastern Europe

Understanding economic development in the transition economies of Central and Eastern Europe (CEE) requires an analysis of investment in these economies. Previous analyses, however, have focused primarily if not singularly on the role of foreign direct investment (FDI; Akbar & McBride, 2004; Clague & Rausser, 1992; Uhlenbruck & De Castro, 2000). This focus follows that of regional policy-makers, who heavily encouraged FDI through acquisition or greenfield investments (Frydman, Rapaczynski, & Earle, 1993). These policy-makers, however, additionally established stock exchanges in each of their countries. There are now at least 24 operating stock exchanges in CEE and the countries that previously made up the former Soviet Union and the former Yugoslavia.¹1In CEE, in Bulgaria (the Bulgarian Stock Exchange, BSE), the Czech Republic (Prague SE), Estonia (Talinn SE), Hungary (Budapest SE), Latvia (Riga SE), Lithuanian (NSEL), Poland (Warsaw SE), Romania (Bucharest SE), Slovakia (Bratislava SE), Slovenia (Llubljana SE); in the former Soviet Union, in Armenia (Yerevan SE), Belarus (BSE), Georgia (GSE), Kazakhstan (KASE), Kyrgystan (Kyrgy SE), Moldava (MSE), Russia (RSE), Tajikistan (TSE), Ukraine (UKRSE), and Uzbekistan (Tashkent SE); in the former Yugoslavia (not including the EU accession states listed above as CEE, in Croatia (Zagreb SE), Macedonia (MSE), Montenegro (MSE), and Serbia (Belgrade SE). The role of the development of these local stock exchanges in the development (LSED) of local economies (primarily through foreign portfolio investment) has not yet been systematically examined, nor has it been linked explicitly to the role of FDI. Finally, the role of local companies' listings on foreign exchanges (FSEL) has not been examined in tandem with the role of FDI or LSED (for an examination of the relationship between FDI, LSED, and FSEL, however, see Claessens, Klingebiel, & Schmukler, 2001). We provide that examination here, and suggest the links between FDI, LSED, and FSEL in the development of these economies. The link we suggest is sequential, in that initial economic development is primarily associated with FDI. As opportunities for FDI decrease over time, however (primarily because of the lessening availability of potential acquisitions, but also given saturation in the greenfield arena), further economic development depends primarily on LSED and FSEL. Thus we propose a positive but non-monotonic relationship between FDI and economic development, a positive and monotonic relationship between LSED and economic development, and between FSEL and economic development, and a sequential association between these relationships.