Size, competitiveness and FDIs : small or transition country curse?

Abstract

The objective of the paper is to assess the relationship between a set of competitiveness indicators and foreign direct investment (FDI) inflows with reference to the size and transition-economy status of a heterogeneous set of 60 countries. Results suggest that an increase of competitiveness is robustly, statistically and sizably related to an increase of FDI inflows. Goods market efficiency, market size and business sophistication were identified to have been particularly important for FDIs. However, the positive relationship between competitiveness and FDI is weakened or wiped out in a small country, suggesting that, because of their size, small countries need to undertake extra efforts in converting their improvements in competitiveness to work in favour of FDI attraction. On the other hand, we do not find robust evidence that transition economies are disadvantaged in improving their competitiveness to attract FDIs. Given that many transition economies are small, we suggest that it has been rather the size of the country and not the fact that it has gone through a transition process, which may have affected how its competitiveness works for attracting FDI.