FDI performance: a stochastic frontier analysis of location and variance determinants

The opening up process of the eastern European countries was marked by greater integration of FDI with their western neighbouring countries. Using the single-step ML approach to stochastic frontier analysis, the location and variance determinants of FDI are estimated using the knowledge capital (KK) model framework. The findings, based on a panel of bilateral FDI stocks from 10 western to 10 eastern European countries over the 1996-2007 period, suggest FDI is determined by both horizontal and vertical motives while the process of liberalization and infrastructural developments significantly reduces the variance of FDI. In using a stochastic frontier specification of the KK model, the efficiency of FDI performance is identified relative to maximum levels. The bilateral efficiency scores suggest a mixed performance, indicating scope to improve the efficiency of FDI.