The effects of state aid policy trade-offs on FDI openness in Central and Eastern European Countries

Abstract

Scholarship suggests that much of the success of the FDI-led economic growth policies of Central and Eastern European Countries (CEECs) is due to investment incentives that national governments made available to multinational corporations, particularly in the form of state aid. Less attention has been given to how inward FDI policy among CEECs is affected by the policy trade-offs that the use of different state aid tools entails. This article builds on insights from qualitative case studies to argue that not all state aid is the same. It tests this proposition against those quantitative studies that failed to find a consistent effect of government incentive policy on the host country’s openness to – or reliance on – FDI on a sample of 11 CEECs between 2000 and 2018. The findings support the claim that those measures aimed at promoting regional development are associated with more openness to FDI, but also that this relationship has started to falter following changes in state aid control policy. The key policy implication is that the contradictions between the different levels of governance at which state aid is regulated affect the host countries’ use of this measure as a tool of investment attraction for economic growth policy.

Keywords

• state aid policy
• inward FDI policy
• Error Correction Model
• Central and Eastern Europe
• investment incentives