The FDI and Trade relationship revisited under structural change: evidence from a sector-based analysis in Central and Eastern European countries

This study revisits the long standing argument on the Foreign Direct Investment (FDI) and Trade relationship in an effort to shed some new light on the issue as well as investors’ behavior. This is achieved within the context of structural changes as proposed by the Investment Development Path (IDP) paradigm. In addition, it does so in a sector-based framework where more accurate results may be obtained and safer implications may be outlaid. We use an expanded dataset of Central and Eastern European countries, from the early stages of transition in 1992 to 2006 covering a variety of location factors. Results pinpoint to a differential relationship between FDI and imports among the sectors, indicating a complementary one for manufacturing (secondary) and services (tertiary) and a substitution one for agriculture (primary). In the case of FDI we find strong locational characteristics such as the large market size, the gradual improvement of the macro-environment and finally the quality of labour force as centripetal forces, well documented along the structural changes framework of the IPD we employ here.