The endogeneity problem and fdi in transition: evidence from the privatized glass sector

This paper analyses the crucial factors determining the foreign direct investment (FDI) going to the privatized glass sector in the Czech Republic. In our research we felt that there was a scant evidence in Central and Eastern Europe of the determinants of foreign direct investments (FDI) at the micro level and we were aware of the endogeneity issue of FDI. The aim of this paper is to fill these gaps. The choice of the glass sector allows for an analysis of a firm's micro characteristics that attract foreign direct investors in an industrial sector, while reducing the impact of macroeconomic factors in their choice. Our econometrical analysis, using original panel data from 1990 to 2006, gives strong evidence that foreign direct investors in the glass sector in the Czech Republic have chosen larger and more profitable firms that were intensively restructured and privatized at the beginning of the transition. Our results support the relevance of the endogeneity issue in the choice of foreign direct investors in transition countries.