engleski

Foreign Direct Investment and Transition: Challenges for the Croatian Economy

We argue that FDI is not a "magic wand". In addition to the positive effects on the development of the host country, we hypothesize that it also carries some risks which should be recognized and addressed properly. The main challenge for the host country authorities, as regards FDI, is to create a framework for foreign investment which will maximize the dynamic positive contribution to development and minimize its costs. We review the arguments and evidence on this hypothesis, and conclude that it has some validity. FDI affects development and growth through various channels that are not always measurable nor susceptible to exact anaytical scrutiny. It mainly works as a source of finance, directly helping the host country's actual investment, or indirectly through raising total factor productivity and the efficiency of resources. It achieves these effects through the linkages between FDI and trade, creating spillovers and externalities, and through its direct impact on structural factors in the host economy. As a source of external finance FDI is less volatile and therefore more desirable than short-term capital which is subject to sudden reversals. The long term effect of FDI on the host economy includes the stimulus it provides to the creation and maintenance of a transparent institutional structure enabling the proper functioning of a market economy. The costs of FDI may include crowding out of domestic firms, undesirable developments in the market sructure of the host economy, or a temporary worsening of the current account balance.

foreign direct investment; development; risks and benefits

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