Abstract:
This study examines whether the CEECs' financial market development can explain the EU FDI in the CEECs during 1994-2012. The higher bank credit flows had a positive effect on the FDI in 2005-2012. This can be attributed to the major banking sector reforms undertaken before the CEECs' EU accession. Second, the stock market size had a positive effect in 1997-2004. This is due to the fact that the EU membership announcement facilitated deeper stock market integration. Third, the higher country income, in interaction with a higher bank credit flow, had only a small positive effect in 2005-2012. The higher income CEECs have pursued much deeper bank liberalization through large-scale privatization of state-owned banks. Finally, the higher country income, in interaction with a larger stock market size, had a negative effect in 2005-2012. A possible reason for this is that the EU countries have started to divert their new FDI to the non-EU countries.