The collapse of communism has started a dramatic change in the economies and societies of eastern and central Europe (ECE). The transformation from a planned to a market-economic system has lead to the opening of previously closed markets. Since 1989 this region is not only a new market to sell to, but also a place to produce. And especially western-European enterprises might benefit from this due to short distances, which help to integrate these locations into a worldwide firm-strategy.
European companies now have got the same possibilities like the US or even Japan to produce cheaper directly at their doorstep. However, the integration of ECE does not simply mean the extension of western markets to an eastern location. There is much more such as the complete restructuring of western production chains. Or in other words, there is a dual process of transformation (east) and structural change (west).
This report focuses on Poland and its foreign direct investment (FDI) inflows since 1989. In order to evaluate the importance of FDI for Poland, three guideline questions are asked: (1) Why do companies invest in general in foreign areas? (2) Why received this specific country capital from international investors? And (3) finally, to what extent and in which sectors have foreign investors invested? Therefore, a core model in economics was used to solve these questions: the concept of ownership-, location- and internalisation-specific advantages.
One does not know what future might bring. But for sure Poland has tried to find its position within a new world order. After centuries of dependence, this county now seems to be willing to search for a bright future. Therefore FDI are seen to help to stabilize and to develop that country. And even the short period of time since 1989 might underline this, too.
Table of contents
1 Introduction and academic method
2 Theoretical background
2.1 Foreign direct investments
2.2 Paradigm of ownership, location and internalisation
2.3 Traditional theories of foreign direct investments
2.3.1 Capital arbitrage theory
2.4 Modern theories of foreign direct investments
2.4.1 Product-cycle model
2.4.2 Hymerian view
2.4.3 Internalisation theory
2.4.4 Eclectic theory
2.5 Political risk
2.5.1 Types of political risk
2.5.2 Obsolescing bargain model
2.6 Conclusion of the theoretical part
3 Foreign direct investment location Poland
3.1 Economic status
3.2 Reasons for foreign direct investments in Poland
3.2.1 General method to asses a location
3.2.2 Application of the OLI on Poland
3.3 Flows of foreign direct investments into Poland
3.4 Effects of foreign direct investments
3.4.1 On the source country
3.4.2 On the host country
4 Conclusion
Objectives and Topics
This report investigates the phenomenon of Foreign Direct Investment (FDI) in Poland since 1989, focusing on the theoretical foundations and the specific motivations for international investors. The primary objective is to analyze why companies choose foreign expansion and to determine the specific factors—such as economic stability and location advantages—that have made Poland a primary destination for FDI among post-communist states.
- The OLI (Ownership, Location, Internalisation) paradigm as a framework for FDI.
- Traditional and modern economic theories regarding capital mobility and corporate strategy.
- The influence of political risk and the application of the Obsolescing Bargain Model (OBM).
- Analysis of Poland’s economic status and its attractiveness as an FDI host.
- Evaluation of FDI flows and their sectoral impact on the Polish economy.
Excerpt from the book
2.5.2 Obsolescing bargain model
Developed by Vernon [1971, pp21] the obsolescing bargain model (OBM) assumes that local investors are generally preferred to foreign ones. [Moran 1999, pp15] This applies especially in non-complete market economies. In addition, the model suggests there is some kind of bilateral monopoly between the host country and the investing firm. Before the contract is signed, uncertainty for the country is high. This is due to the fact, that the investor always can re-negotiate or change behaviour. Later, after the investment is done, the company has to bare the risk. The reason for this is that the behaviour of governments and local circumstances can change dramatically not to the favour of the investor. In the worst case, the mentioned types of risk apply.
However, Vernon [1971, pp56] continues to argue, investments shall be undertaken if the benefits outweigh the risk in terms of political and economical costs. The degree of risk depends on several aspects: First of all, OBM questions how long the investor is crucial for investment’s success. This applies for example to the access to foreign markets (investors home market), to a continuing technology- or investment-transfer as well as to the amount of time that is needed to transfer the relevant knowledge.
But also the kind of investment is interesting to look at within the OBM: If a company does a ‘one-off’ FDI (e.g. a oil-rig or a refinery), the risk included might be the highest due to the fact, that the investor is afterwards not necessary anymore. Therefore the government could tend to think about breaching contracts or confiscate investor’s property. Moreover, a stable technology and undifferentiated products are seen to carry high risks on the long run for investors as well. Compared to this, a continuing flow of know-how such as in the high-tech industry protects against risk.
Summary of Chapters
Introduction and academic method: This chapter outlines the transition of Central and Eastern Europe to market economies and sets the research questions regarding corporate motivations for FDI in Poland.
Theoretical background: It provides a deep dive into the OLI paradigm, traditional capital arbitrage, and modern theories including the OBM to understand the microeconomic perspective of international business.
Foreign direct investment location Poland: This section applies theoretical concepts to the Polish context, analyzing the country’s economic status, its specific location advantages, and the sectoral distribution of FDI inflows.
Conclusion: The final chapter synthesizes the research findings, confirming that Poland's stability and integration into the European economy have successfully attracted significant foreign capital.
Key Terms
Foreign direct investment, FDI, OLI paradigm, Ownership-specific advantages, Location-specific advantages, Internalisation, Obsolescing bargain model, Political risk, Economic transition, Poland, Capital arbitrage, Market entry, Multinational company, High-tech sector, European integration.
Frequently Asked Questions
What is the primary focus of this research report?
The report focuses on the dynamics of Foreign Direct Investment (FDI) in Poland following the collapse of communism in 1989, examining both theoretical causes and practical investment developments.
Which economic paradigm serves as the foundation for the analysis?
The study utilizes the OLI (Ownership, Location, and Internalisation) paradigm to explain why multinational companies choose to invest in foreign markets.
What is the central research question?
The report addresses three main questions: why companies invest abroad, why international capital flows specifically to Poland, and the extent and sectoral distribution of these investments.
How is the analysis structured methodologically?
The research relies on a review of current literature and the application of generally accepted economic theories, combined with a microeconomic perspective on corporate decision-making.
What topics are covered in the theoretical part of the report?
The main part covers traditional theories like the capital arbitrage model, modern theories such as the product-cycle model and internalization theory, and the impact of political risk on investment.
Which key variables define the attractiveness of Poland for investors?
Key variables include the country's political and economic stability, a highly skilled workforce, relatively low labor costs, and its strategic path toward European Union membership.
How does the Obsolescing Bargain Model (OBM) assess investment risk?
The OBM evaluates risk based on the duration of the investor's crucial role, the nature of the investment (one-off vs. continuous knowledge flow), and the political sensitivity of the host country.
What does the data show regarding FDI trends in Poland?
The data highlights a significant increase in cumulative FDI stock, particularly since 1995, with the manufacturing, banking, and retail sectors being the primary recipients of capital.
- Quote paper
- Michael A. Braun (Author), 2003, Foreign direct investments in Poland since 1989 - Theoretical background, specific advantages and recent developments, Munich, GRIN Verlag, https://www.grin.com/document/69566
