Trade balances of the central and east European EU member states and the role of foreign direct investment

Abstract

Given the large trade and current account deficits in some of the new EU member states the development of their external economic situation plays a role in assessing their aptitude to enter the European Monetary Union. The empirical analysis with aggregated data indicates that in the eight central and east European EU member states FDI and trade are complementary. This result is confirmed by an FDI enhanced gravity model which makes use of sectoral data provided by the Bundesbank's micro database direct investment (MIDI). The net effect of FDI on the trade balance is ambiguous, but FDI in high-tech industries clearly stimulates exports more than imports. Technological spill-over and the conglomeration of human capital seem to be important factors for the export performance. Against this background the prospects for the Czech Republic, Hungary, Slovenia and the Slovak Republic look more favourable compared to the Baltic states. --foreign direct investment,trade balance,gravity model