DP3515 Ownership, Capital or Outsourcing: What Drives German Investment to Eastern Europe?

Author(s): Andzelika Lorentowicz, Dalia Marin, Alexander Raubold
Publication Date: September 2002
Keyword(s): capital flows, corporate governance, Eastern enlargement, globalization, vertical vs horizontal FDI
JEL(s): F15, F21, G32, G34
Programme Areas: International Trade and Regional Economics, Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3515

The Paper takes a first look at the host and home country effects of German foreign direct investment (FDI) in Eastern Europe based on new survey data of 1050 investment projects in Eastern Europe by 420 German multinationals during the 1990s. We find that German investors transfer a substantial amount of financial capital to Eastern Europe. Furthermore, the most dynamic and innovative segment of the German economy invests in the East which explains why single owned firms dominate as the form of control. We also find strong evidence for vertical FDI suggesting that German corporations are outsourcing a substantial share of their production to Eastern European affiliates to exploit lower wages in the East.