Imports and FDI as complements or substitutes? New theoretical considerations and empirical evidence

Central and Eastern European Countries (CEECs), with the opening up of their borders and their liberalisation process, have emerged as important players in the international arena. At the same time it is well established in the literature, that both trade and FDI are growth-enhancing factors, thus, their relationship is of particular importance for the growth prospect of CEECs. Following Dunning’s Investment Development Path (IDP), the present study develops a new theoretical framework to study the FDI-Imports relationship in the region and simultaneously to trace significant the determinants of FDI in the region by incorporating factors that capture the overall political and economic stability. The study advances further current research and our understanding of the above by discriminating among agricultural, manufacturing and services sectors. Our empirical investigation deviates from conventional testing procedures, to accommodate our research questions. We follow the Zellner and Theil (1962) simultaneous equation method that takes into account endogeneity problems between variables, in our case Foreign Direct Investment (FDI) and Imports. Our key hypothesis on the existence of a complementary FDI-Imports relationship is confirmed. Our results also provide evidence that CEE economies have recently moved to the third stage of IDP and confirm the importance of specific location advantages, economic and political, as key determinants of inward FDI in the region.