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Investment by foreign companies can play a vital role in helping Communist countries move to a market economy. What pitfalls and progress can be reported? (1)
Policies intended to develop the private sector in the countries of central and eastern Europe (CEECs) and New Independant States of the ex-Soviet Union (NIS) must aim at enhancing opportunities and reducing uncertainties for investment. In particular, they include: sound macro-economic policies; a stable political framework; a legal and institutional framework for private business, including tax policies; efficient mechanisms for privatisation; a sound financial sector; and the promotion of foreign direct investment (FDI).
Investment by foreign companies is particularly important in the transition from a centrally planned to a liberal, market economy, since FDI can act as a powerful catalyst for economic change. It offers not only financial resources for host countries; it also brings technology, management, a 'business culture' and access to foreign markets -- each of which factors can help overcome obstacles to the development of the private sector. (2)
The performance of flows of FDI to the CEECs and NIS has been mixed. Thousands of foreign companies have invested in the region, the number of projects with foreign participation is expanding rapidly, and the value of FDI flows is increasing. The overall volume of FDI in the region nonetheless falls dramatically short of the external capital required for a rapid increase in the standard of living (Figure) (Figure omitted). Since early 1993, moreover, FDI flows seem to be levelling off, even in the more advanced of these economies.
This weak performance is disappointing in view of the attractive opportunities for large-scale FDI that many of these countries offer: relatively large, sometimes even vast, internal markets that urgently require an efficient consumer-goods industry, and in some cases enormous natural resources. But many of the home countries for FDI are in recession and have reduced their outward investment, while potential hosts have to face competition as a location for investment from other regions of the world -- and their domestic economic performance is often still very weak.
POLITICAL STABILITY
Sound macro-economic policies and a political commitment to democracy and the market mechanism are not enough to assure foreign investors. To induce companies from abroad to bolt down their...