Swedish FDI into western European Countries

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Previous studies

In a paper presented by Avik Chakbrabarti (2001), “The determinants of FDI: Sensitivity analyses of cross-country regression”, several variables and their explanatory powers for FDI inflows to 135 different countries are discussed. The study contains variables such as market size (GDP), labor cost and trade barriers growth rate among others. One of Chak-brabarti’s primary findings regarding the variables relationship to FDI is that market power (per-capita GDP) has explanatory power over FDI. Chakbrabarti also found that other va-riables such as tax, wages, openness, exchange rates, tariffs and growth rates of GDP are typically controversial variables in the FDI discussion and are highly sensitive to small changes in the conditioning information set. The author claims, however, that the host country’s openness to trade is the variable that has the strongest correlation to FDI. There-fore, in order to attract FDI countries should engage in world trade.
Laura Resmini (2000) investigated the determinants of FDI in the CEE’s at the manufac-turing sector level. The main findings were that in general FDI in this region is targeted at local markets and that foreign investors prefer large markets with high growth rate pros-pects. The CEE’s progress towards a market economy has a major impact on FDI inflows, especially in science-based and capital intensive sectors, whereas the wage differences affect FDI in the scale-intensive and science-based sectors. The degree of economic openness and the possibility to exploit agglomeration economies influence FDI flows in the tradi-tional sectors, and the proximity to Western Europe has an advantage in capital intensive and science-based sectors.
There are also some important policy implications that can be drawn from Resmini’s re-sults. In general the path and pace of structural reforms are important for attracting FDI but factors such as type of investor, the technology transferred in the process and the level of industrial restrictions play an important role as well.
Resmini points out that the Czech Republic, Poland and Hungary have been successful in the transition process and have managed to attract more capital intensive FDI than scale intensive FDI. The reason that these countries have succeeded in attracting FDI is due to their relatively substantial and long-term commitments. According to Resmini other transi-tion economies which are less advanced should focus on stabilizing their overall business environment in order to attract a high and sustainable level of FDI in the manufacturing sector.

Swedish FDI into western European Countries

During the 1990s Sweden’s FDI outflows increased, a process to which several factors have contributed. Globalization has played an essential part, since firms have moved their production outside their own country and entered new markets.
Other factors contributing to the increased FDI outflow can be Sweden’s entering into the European Union in 1995 and the deregulations it brought. Looking at the graph in figure 1 we can see that the Swedish FDI outflows have increased prominently during the years. However, year 2002 this trend turned and there was a decline in outflows until 2005 where there was a change of trend.
The exchange rate is another factor that affects the value of Swedish FDI. According to the TCW-index1 the Swedish crown depreciated by 2.1 percent in 2007. The crown depre-ciated against the euro by 4.4 percent and appreciated against the U.S. dollar by 5.5 percent and the British pound by 4.0 percent. When looking at Swedish assets abroad there have been mainly increases in North America, however the assets have increased in Germany as well to a large extent, mainly due to the shareholder’s equity, which depends on enterprise acquisition and profits that have been reinvested (Statistics Sweden, 2009).

Swedish FDI into CEE- countries

Figure 2 shows the FDI flows from Sweden to Eastern European countries. The trend line in the figure shows that over the years FDI has managed to more than double itself. Swe-den is mainly targeting Estonia and Poland for its FDI, but Hungary is also an important host country for Swedish FDI.
The role of foreign direct investment is important for the transformation of the formerly centrally planned economies in Central and Eastern Europe towards a market economy. FDI provides these countries with sources of investments in order to improve their indus-trial structure but also for developing their quality of infrastructure. The flows of FDI into these countries bring new skills and technologies, which in time improves the attractiveness for further investments. The largest investors that provide the major inflow of FDI into the Eastern European countries are Germany, Austria, Czech Republic and USA. Germany be-ing the largest investor is benefitting from being closely located to the new member coun-tries (Lansbury, Pain & Smidkova, 1996).The general expectation regarding flows of FDI is that they consist primarily of flows from advanced countries into developing countries which are more politically stable and have larger regional markets than the average transi-tion country.

Aspects of an EU-enlargement in 2004

In May 2004 ten new member countries entered the European Union. Nine of them Cy-prus, Estonia, Latvia, Lithuania, Poland, Slovakia, Slovenia, Czech Republic and Hungary are all Central and Eastern European countries and will be referred to CEE countries2.
Accession of these countries came with the expectations of stimulating inflow of FDI since the business environment seemed more attractive and the confidence for investments in-creased. This happened since FDI from both old member states and from countries from the rest of the world increased, leading to a general growth in investment, employment and productivity (Bevan & Estrin, 2004).

1 Introduction 
1.1 Purpose
1.2 Disposition
2 Background 
2.1 Previous studies
2.2 Swedish FDI into western European Countries
2.3 Swedish FDI into CEE- countries
2.4 Aspects of an EU-enlargement in 2004 .
3 Theoretical Framework
3.1 Location specific paradigm
3.2 GDP Growth
3.3 Labor cost per output
3.4 Property Rights
3.5 Dummy variables
3.6 Expected signs of the explanatory variables
4 Empirical framework
4.1 Data and hypothesis
4.2 Regression results
4.2.1 Swedish FDI into OECD and CEE countries 2000 .
4.2.2 Swedish FDI into OECD and CEE countries in 2008
5 Conclusion 
References

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The Determinants of Foreign Direct Investment

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