Formation of Foreign Direct Investment Policy: Case of Estonia

Abstract

The problems towards foreign direct investment (hereinafter FDI) have been the subject of debate from the 1980s. The benefits of FDI are obvious: it is one of the main sources of external finance, which is especially important for developing economies. It is highly important to attract foreign direct investments for countries with rapidly growing economies. In order to direct foreign investments into the problematic business areas or problematic regions, targeted FDI policy is essential. However, because the countries with growing economies usually seek to attract foreign capital by any means, uncontrolled foreign investment can bring more harm than benefit.

The aim of the article is to develop a complex-targeted FDI policy that would bring the greatest benefit to the state. The authors raise the question how to attract targeted FDI inflows.

When selecting a method for the formation of FDI policy, another problem arises: the methods based on correlation-regression analysis are frequently applied in the literature. This analysis is helpful in assessing relationships between individual factors; however, it does not allow determining the complex components of FDI policy. The authors assume that FDI policy is characterized by multi-criteria, therefore one of the qualitative multi-criteria methods – ANP – has been chosen for an empirical study because of the fact that, using this method, not only the effect of a criterion or sub-criterion but also the relationships between the sub-criterion are assessed. The criteria system is based on SWOT analysis. Four alternatives to current FDI policy are suggested which account for the threats and weaknesses that are characteristic of the Estonian economy. The following alternatives for FDI policy are proposed: FDI policy focused on the service sectors; FDI policy focused on the export promotion; FDI policy focused on R&D, and FDI policy focused on the manufacturing sectors. According to the research, FDI policy in Estonia is mostly influenced by its strengths and opportunities. The main weakness is the research and innovation system that may prevent from the attraction of FDI in knowledge-intensive sectors. A repeated synthesis highlighted Estonia’s potential to successfully attract FDI and to exploit them in the knowledge-intensive services, high-tech and medium-tech sectors. The research results indicate that attracting FDI to the service sector would be the most effective policy that would bring a long-term positive impact on the country’s economic development.

DOI: http://dx.doi.org/10.5755/j01.ee.25.2.4263