Foreign Investment in the East European Transition

By Welfens, Paul J. J. | Management International Review, July 1992 | Go to article overview

Foreign Investment in the East European Transition

Welfens, Paul J. J., Management International Review

Dr. Paul J.J. Welfens PD, University Lecturer in European Economic Policy/on leave from East European Economics, Westfalische Wilhelms-Universitat Munster, Munster, Germany.

Introduction Having experienced a decade of economic stagnation and increasing political and economic disruptions the East European economies -- including the republics of the former USSR -- have finally decided to radically change their socialist economic system and move towards a market economy. In order to achieve a market-based system one has to undergo a lengthy transition process in which new institutions are created, the distortions of the command economy removed and the supply-side is reorganized in a way that economic resources are efficiently produced and distributed. As opening up the economy and introducing domestic competition will render a great share of the capital stock obsolete the task of rebuilding the capital stock in Eastern Europe is decisive. Foreign investors could play a major role in this process in the long term, although it is doubtful that Eastern Europe is well positioned in the global race to attract highly mobile capital.

In the second half of the 1980s foreign direct investment (FDI) grew at annual rates that were three times as high as the growth of international trade which reached some $3000 bill. at the end of the 1980s. According to JETRO (1991) investment outflows reached in 1989 $197.8 bill. worldwide: Japan reached the position No. 1 for the first time, namely with FDI outflows of 44.1 bill. followed by the U.S., the U.K., France, Germany and The Netherlands with 31.7, 31.7, 18.1, 13.4 and 9.9 bill, respectively. However, Japanese investors do not play any significant role in Eastern Europe, and indeed it seems that they take a wait and see attitude that was already apparent in the case of Eastern Germany. West European and U.S. investors so far dominate, but this might change in the 1990s if politico-economic stability can be established at least in part of the East European region.

Compared to the former GDR the other countries of the former Council of Mutual Economic Assistance (CMEA) are facing a much more complex transition process to a market economy. The external transfer of resources will certainly remain modest and those countries have to develop the whole set of institutions for a market economy on their own. Moreover, the massive know-how transfer achieved in East Germany via West German firms and authorities dispatching senior management or consultants and experienced civil servants, respectively, is no feasible avenue for the former CMEA countries. Moreover, if firms are dismembered before privatization, the scarce management factor becomes an even more pressing bottleneck factor in Eastern Europe. A reasonable privatization strategy is therefore urgently needed on the one hand, on the other hand, a really open approach to FDI has to be developed -- and still existing restrictions on the purchase of land be abolished -- if foreign investors should really contribute for supply-side adjustment and economic growth. The traditional joint venture approach is absolutely inadequate; the series of foreign investment laws in the 1980s, most visible in Poland (Bieszki and Rath 1989), only testifies to the sustaining need to improve conditions for foreign investors in a region that was weakly integrated into the world economy.

A modern market economy is characterized by the interplay of the invisible hand of market signals and market forces as well as the visible hand of national and multinational companies; in such an economy government is no longer a major producer, but is assumed to provide a credible framework of institutions, laws and regulations that define individual rights and assure that legal claims can be enforced and liability rules applied. Only then can private contracts been enforced such that the market system can work. Non-market decisions play some role in the context of the labor market in all economies, but it is obvious that wage bargaining behavior will change in the transition to a market economy. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)


1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Cited article

Foreign Investment in the East European Transition


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.