Ownership, Capital or Outsourcing: What Drives German Investment to Eastern Europe?

The paper takes a first look at the host and home country effects
of German FDI in Eastern Europe (EE) based on new survey data of
1050 investment projects in EE by 420 German multinationals during
the 1990s. We find that German investors transfer a substantial
amount of financial capital to EE. Furthermore, the most dynamic
and innovative segment of the German economy invests in the East
which explains why single owned firms dominate as the form of
control. We also find strong evidence of vertical FDI suggesting
that German cororations are outsourcing a substantial share of
their production to EE affiliates to exploit lower wages in the
East.