Faculty of Economics and Business Administration Publications Database

Foreign Direct Investment, Political Resentment and the Privatization Process in Eastern Europe

Authors:
Sinn, Hans-Werner
Source:
Volume: 12
Number: 24
Pages: 179 - 210
Month: 4
ISSN-Print: 0266-4658
Year: 1997
Keywords: Privatization; Foreign investments; Economic policy; Going private; Practical politics
Abstract: Foreign direct investment has been disappointingly low in Eastern Europe, which has been reluctant to make existing assets available to foreign investors. To mitigate any such resentment, a participation model could be used in which foreign investors compete for joint venture contracts. Host governments contribute existing assets and receive non-voting stocks. Foreign investors, contributing capital and knowhow, receive voting shares and control of operational decisions. This has several advantages over the cash sale of assets to foreigners. First, stock flow problems are eased, raising both asset prices and FDI flows. Second, by retaining some stake in the firm, transition countries share in the risk premium. Third, governments can hand over their shares to households, creating private collateral to foster new small businesses. Fourth, and crucially, compared to cash sales the auction of participation contracts offers higher privatization revenues in cases where governments cannot assess investors'' knowledge and abilities. This reduces the risk of selling the family silver too cheaply and should alleviate the host countries'' resentment.
back