Foreign direct investment financing of capital formation in central and eastern Europe

This paper looks at the relation between foreign direct investment (FDI) and gross fixed capital formation in transition countries as well as other sources of capital formation financing, namely debt financing, capital market financing and subsidies. The paper shows that capital formation is positively associated with FDI, along with domestic debt and capital market financing, but negatively correlated with stock market liquidity. There is no statistically significant link between capital formation and foreign credit or subsidies. The paper also shows that FDI is a substitute for domestic credit but is complementary with foreign credit and privatisation revenues.