External Balance in a Transition Economy: The Role of Foreign Direct Investments

This paper analyzes the development of the external balance in five Central and East European countries: Czech Republic, Hungary, Poland, Slovakia, and Slovenia. The paper applies, expands, and empirically verifies the ideas of life-cycle theory in the area of the effects of foreign direct investment on the balance of payments in transition countries. The article defines and explores the basic general stages in the external balance of a transition country. The definition of the stages draws from a model of consumer behavior within the life-cycle theory. The external balance stages are defined as follows: young transition economy, mature transition economy, posttransition economy, and expanding economy. The paper develops a model that provides criteria that not only classify the current stage of each transition country, but also evaluate the success in the catching-up process of the country examined.