The Dark Side of Landlockedness: Determinants of FDI in Transition Economies

This study delves into the factors that influence foreign direct investment flows to 12 transition economies in the Commonwealth of Independent States. Key findings based on panel data from 2002 to 2020 reveal several important insights about geographic, market, and institutional determinants of FDI.

Key Points:

Positive factors influencing FDI:

Market size: Larger economies attract more foreign investment.
Trade openness: Countries open to trade see increased investment.
Natural resources: Resource-rich countries are more appealing to foreign investors.
Institutional quality: Strong institutions, economic freedom, and rule of law enhance foreign investment.
Sea access: Coastal countries benefit from easier access to broader markets.

Negative factors deterring FDI:

Landlockedness: Countries without sea access face higher transportation costs and market limitations.
External debt: Higher debt levels deter foreign investment.

Landlockedness vs. Sea-access:

Coastal countries have a distinct advantage over landlocked nations in attracting FDI due to reduced transportation costs and better access to global markets (provides 177.8% advantage in attracting FDI).
However, the negative impact of landlockedness can be mitigated by establishing efficient transportation and infrastructure systems, including seaports (creates 56.8% disadvantage in attracting FDI).

Recommendations for landlocked countries (e.g., Armenia, Belarus, Kyrgyzstan, Moldova, Tajikistan, Uzbekistan):

Improve internal and external transportation infrastructures to reduce the negative effects of landlockedness.
Invest in creating efficient transport links to major global markets and neighboring coastal countries.

This analysis underscores the importance of geographic and institutional factors in shaping FDI flows, particularly for landlocked countries in transition economies.