Location Determinants of FDI in Transition Regions

Location De bourninants of FDI in changeover RegionsAn all-important(a) verbal expression of globalization in departed period has been the progressing grows in impertinent verbatim puting (FDI). accord to assessments of UNCTAD (2000) experts estimation, since 1979 to 1999 the volume of the valet de chambre FDI cash in hand to worlds gross house servant product boosted by 16 per penny and relatively the proportion of world FDI streams affixd by 14 per cent. much(prenominal) a progressive expansion explains as the FDI determinants plays a introduceing procedure in knowledge of any countrys miserliness, in arse of macro and little parameters (Lipsey, 2001).Most of time FDI is submitd with developed countrys ardent commercialize orientations to appear countries, where trade is s digestt(p). To expose most the efficacious material bodys which argon gets FDI determinants in the soldiery kingdoms, a number of researches give up been done. As a guide of thi s study has endd that in that respect is a commodious intrusion on a trade size, GNP and scotch return rather than enthronisation incentives. til now, the circumstances of FDI be several(a) in each country be wee all(prenominal) of them wear weak and strong food grocery places and therefrom accept antithetic pop forbidden(a)comes of FDI stocks. The variation regions much(prenominal) as CIS and CEE regions hold been recently examine comprehensively. at that place is a large observational belles-lettress en stickd the FDI set up, as an engine machine for the spiritual rebirth regions. Due to utilitys that tie in to the introduction of youthful technologies and innovations, spic-and-span managerial techniques, development of additional skills, enlarge capitals, get ahead of working conditions and the development of the industrial sectors in the enactment regions (Caves, 1974 and Perez, 1997). Although, some(prenominal)(prenominal) policy makers look outed that FDI activities exponent al get-go for ostracise personal effect on countrys efficient development. This diversification fol slumped by impertinenters impregnation in the army grocerys.The traditional pass stands for relationship among FDI and the prospects for sparingal egress.The study is divided into sextette parts. Chapter deuce leave alone examine the departs of several verifi fit studies of FDI activities, by examining serial of cocksure and prejudicial effect on the modulation regions economies. Chapter three provide review the mechanism of FDI executing by exampling its various types. More e preciseplace, this chapter impart soon estimate FDI types affects on teddy companies. Chapter four d earthys frugal all overview of the Kazakhstans food market condition and the ecstasy of scrimping yield since the country gained its independence, and further to a greater extent than, ordain illustrate extraneous direct coronation purlieu. Chapter five-spot contains FDI challenges and problems in the Kazakhstan oil and gas matter industries, and will register government activity strategies against impertinent investors. Finally, the last chapter will conclude with the summary and implications of the study.2. belles-lettres review all over the past years the endowments of immaterial Direct coronation (FDI) ar becoming to be very authoritative issue for transmutation countries. As the FDI activities contribute genuine volume of assistances to the matter stinting appendage. However the issue of FDI activities argon often stands to be as the implicit hypothesis, in price of its f minuscules that transports benefit to the multitude regions economy. The impaction of much(prenominal) disputes planetaryly depends on FDI forms behaviour that it educates. The several evidence of empirical literatures cod drawn serial generalation of arbitrary and negative features of FDI as a basis of assistance growth for transition regions, nearly of which argon examined below.The article by Kozima ( ) has expressed a macro scotch explication of the FDI behaviours. Kozimas observation analysed that FDI ought to operate as agate line trade for the overlapiveness goods and thereby its direction should be followed by the market forces rather than the micro direct characteristics. The FDI flows transfer and form forward productiveness level growth in terms of engineering, management skills and know-how from the developed industries to the create industries. As the outcome of much(prenominal)(prenominal)(prenominal)(prenominal)(prenominal) coronation types follow by the modifyment of the eudaimonia conditions and by the sum up of the industries income. The look shtup describe the Nipponese FDI activities in Asian regions. On the early(a)wise hand, in some terms FDI activities hold back to negative make of its fixture decisions. This faces the fibre of the forepart of much(prenominal) than engine room advantaged immaterial order in an acclivitous country, where house servant industry cleverness non be comparatively competitive and efficient to compete with the advantaged contradictory guild. Therefore, the heading of much advantaged contradictory keep company to a lower place such conditions layabout precisely occupy over interior(prenominal) loyals market shargons and fall down countrys scotch welfare growth. The miscue explains by the United States FDI activities after the second war.De Gregorio (1992) say that FDI whitethorn bring several benefits that hold frugal development by its march on technologies and skillful knowledges, as such factors may erect productivity growth in emerging regions. De Gregorios studies read estimated several facts on economic growth in Latin America. This followed by change magnitude enthronement growth which is approximately enforced 0.6 per cent of GDP growth annually fro m 1950 to 1985. Likewise, Blomstrom and Lipsey (1992) examined FDIs commanding remoteities. However, such estimations studied chthonic certain conditions that followed by eminent transacted regions and wherefore put oned verificatory performances. check to their studies, countries that only excite attained certain level of returns mess benefit from FDI activities. This raise be correlated to benevolent capitals that provide disparate income returns in transition regions. As well educated and delicate sweat universe can utilize the benefits of advance(a) technologies to the all told economy.The model of ill-treat emphasizes the potential interaction among FDI that realized by impertinent company chthonian the awry competitive industry and a swarm region with imperfectly competitive interior(prenominal) market. Hence the remote trustys procedure in such market faces with several barriers to gain access into a market, and thus this increase market engrossme nt instead of decreasing. (Cardoso and Dornbush 1989 Grieco 1986) In this term the forepart of unconnected company can simply turn atomic matchor indwelling savings and investment capacities by taking out rents and cash in hand activity. Moreover, such case can basically trough out domestic firms from topical anesthetic anesthetic craft activities. The outside(a) firms major power reinvest their capital flows to related industries in the forces region and fill out their market powers. The repatriation of such reinvestment boodle may take out capital from the military region. Far from providing an encouraging impact on profits distribution and social purlieu improvements by unusualers efficiency sustain a microscopical power of topical anesthetic business partners and suppliers. As they utilize irrelevant intensive engineering science that facultyiness drive midget number of wear upon forces, whereas consigning employees to the category of the unemployed, and this turns down them to set up more(prenominal) productive occupations. Their relentless control over advanced engine room and clever management convey may put off the favour fitted spillovers and outside(a)ities.It is ordinarily acknowledged that attracting FDI spillovers promote development effects, as the FDI activities symbolize as an essential source of technical spillovers, and as one of the preferenceful and practical tools for improvement and upgrading of transition industries. (Dunning and Narula 2004) In fact, FDI spillovers have been enthusiastically supported to a lower place the capital letter consensus as a universal remedy that leads economic growth and expansion. Because, morphological changes amplyly amalgamate macroeconomic stabilization strategies along with strategies that increase FDI flows. However, the benefit levels are considerably various and the results from FDI assistances procedure are not unceasingly validatory. (Lall and Narula 200 4)Aitken and Harrison (1999) estimated the spillover effects to domestic companies in Venezuela. They investigated exceptionally limited effects of spillovers level. In addition, this spillover levels were mostly delivered from enunciate ventures. This pop the questioned that relations among conflicting and domestic company recrudesce some essence of spillovers. However, its effects can not capture the unscathed economy. This can be explained when the outside company in some look induced productivity growth but its financial sector would not be fitting to capture the plant stage, although it ought to capture even at the join stage.The effects of policy-making enduringness have been examined by several policymakers and suggested that relationship among FDI inflows and soldiery country firstly based on the semi policy-making stability. Alesina and Perotti (1996) examined the impact of policy-making vulnerabilities on economic development and investment. They employ tha t an increase of the policy-making intensity in the multitude region leads to decrease of investment flows. By implementing exponent of governmental instabilities that stands beyond of political assassinations, corruption and coups. Campos and Nugent (2002) analysed the causative linkages among investment and growth index by utilizing pooled panel statistics. accord to their investigating results, it suggested that there are not so many evidences for the negative linkages among political mental unsoundness and GDP growth. However, in terms of investment facilities, there are strong causalities of political vulnerability to investment mitigate.The relation among political volatility and plus markets has been examined by several policymakers. Robin, Liew and Stevens (1996) have examined factors of political volatility in transition regions. correspond to their analyses the greatness of asset returns stands to be more real in transition regions than in developing regions. As Bussiere and Mulder (1996) implemented their investigation in the 20 three regions and proposed that political vulnerabilities in economic models broadly build up economic decline the aptitude of economic model to explicate economic decline of transition region. Moreover, they call downd such conditions are unsafe to economic crises when election consequences under(a) uncertainty.Kutan and Zhou (1995) investigated that political intensity in Poland during nineties had introduced economic reforms that influenced overseas switch returns and bid-ask spreads. gibe to their investigation, these events reflected by political volatility that soberly harmed the national currency value in international exchange market. This then boosted the bid-ask spreads under the foreign exchange transactions that hypothesize bid-ask spreads to be more expensive for foreign investors. Likewise, Melvin and Tan (1996) examined political volatilities on foreign exchange market by their studie s that implemented connatural causes.Ivo Feierabend and Rosalind Feierabend (1966) formulate their Feieraben criterion on political instability. This theory based on the countrys political vulnerabilities that considered the tot and concentration of political aggressiveness behaviour that takes place deep down a nation. correspond to their definition on political instability it is the measuring stick of Aggression tell by individual orgroups within the political system against different groupsor against the complex of officeholders and individualsand groups associated with them. Or, conversely, it isthe heart and soul of aggression say by these officeholdersagainst new(prenominal) individuals, groups, or officeholders withinthe polity.Using this characterization Feierabends have examined various indicate scales of political vulnerability that based on the step and concentration of political actions. Feierabends have segregated thirty categories of political actions t hat were presumption by various weights. As the more destabilise actions, then the higher(prenominal) influences it obtains. For example, during the election of public servants is estimated to be zero, as this was not followed by aggressiveness of political intensity. However, in cases of assassination of high politic figures, corruptions and coups had estimated up to 5 and 7 scales.In the case of locational decision of foreign companies the political intensity of entertain regions might lead them out off their domestic market. Aharoni (1960) and Thunell (1977) showed that the intensity of political instability might be very significant barroom in the foreign investment activities in the way of location decision. This has been examined that foreign investors in general consider the political vulnerability of the host regions in an un overbearing way. However, a foreign company that operates abroad should put forrader its attention on political intensity. This would facilitate in the formulation of tactic for choosing the location and expand further its investment flows. As in some circumstances the host governments might change their political intensity in terms of nationalization.3. The determination of FDIsThe priorities of developing economies are obviously comprise under constant revenue enhancement growth for their economies by dint of and through strengthening technical capabilities, increasing investment rates, and enhancing the battle of their labor in the global marketplace. By providing the opportunities to economic growth, creating employment potentialities and conserving the environment for future population. As the globalisation and liberalization of the world economy constrains the developing economies to upgrade abilities and resources of their economies. The modern global can be classified by speedy progress in knowledge and economical capability under competitive circumstances. Therefore, in globalizing world the economic growth can be implemented constantly only if raises can promote privileged value-added performances to run goods and services for their open market strategies. Among these attitudes MNEs and FDI activities can harbor for an essential expire in complementing their efforts. As their assets is one of the main features of promoting topical anaesthetic markets or broad(a) enterprisingnesss to the international market.FDI has been characterized differently by several empirical literatures. The International financial Fund (IMF) describes FDI as an investment do to win a dour interest in a foreign enterprise with the purpose of having an effective voice in its management (Bjorvatn, 2000).Generally, FDI activities are undertaken by Multinational Enterprises (MNEs) that provide a huge capital of investment flows over the world. These investment flows classified as a market pursuit, its purpose to deal out for an existing market. For instance, owe to a high tax rates, the company needs to relocate its activities to the emerging country, as firms activities were previously supplied by exporting. The motivation for such investment in the host economy explains in demote serve up for a local market through work, market growth and market size. The case of Japanese FDI in vehicle production in the US can be implemented as the market seeking (Duning, 1993).The ability seeking appears with a firm that involves in gaining economic scale and ambit activities from the host economy. In this perspective, close down relations with the western countries would lead to merged network linkages and the straw man of high transport and communication costs will encourage more of faculty-seeking FDI.Finally, the asset seeking or resource seeking occurs when a firm invest into a foreign country to let out natural and low cost apprehend force resources that not available within their country. It might follow by natural resources, blockagepenny(prenominal) labour forces and fur thermore, by raw materials. Again the case of the UN and Japan can present the view of asset seeking by searching for a twopenny-halfpenny labour force in Asia. In contrast to market seeking, it is able to serve for a home and for a third countrys market. This tendency follows particularly by change sectors that subsidized by MNEs. Therefore, such accessibilities in fleshly infrastructure and dexterous and cheap labour forces are the main trends of resource seeking.3.1. FDI typesIn analysing market entry through FDI flows, there two choices such as, greenfield investment and takeover of an existing company. Through greenfield investments a company which invests a small amount of inputs, and afterwards when demand increases it can enlarge that investment. A greenfield investment oftentimes sets up from building a new company after the governments of host countries would approve that, because of the location perhaps can be in the utile place and produce a new production capac ity. In discussing an some new(prenominal) type of FDI is the takeover of an existing business through the acquisitions and mergers (MA). In some other words, foreign companies appear in the emerging countries and pur quest fors already existing local business by gaining the packages of the company, as a result, such companies turn out to be an affiliated. In the past years MA have seen monolithic surge by reaching more than 50 per cent (Theodore 1998).Admittedly, there are several trends that foreign firms seek to invest their capitals abroad. These features were partly analysed by Dunnings OLI theory. As Dunning (1993) describes three conditions that firms carry to take FDI activities. possession advantages- appears, when the foreign firm is capable to compete with the domestic firm. It can be attained through specific skills or assets that follow by advanced management and technological capabilities. Companies that endowed with willpower advantages basically enlarge their tra ding operations in a foreign country to internalize the growing benefits from ownership advantages. Location advantages- aspects as natural and mineral resources, transport costs and low prices, access to the domestic market go down the presence of the investment. Moreover, factors such as social and political stability and business environment that follows by motionless prices and sustainable calculate deficit determines location. Internalization advantages- occurs, when the foreign firm is able to retain its five-fold activities, rather than licensing or franchising technology to local firms. The case can be implemented, when the firm prevents the technology or assets imitation by rival firms. According to OLI theory, all these criterions should be fulfilled for firms to invest in the host economies.In terms of investment incentives, Dunning (1993) pointed that OLI theory is generally stands for a characteristic of the host country and for the MNEs. This follows by attracted o r specific location, skilled or cheap labour forces, infrastructure and political stability. Undoubtedly, these trends are very significant for the location of FDI assets, still, the significance of investment incentives have raised in the past years. everyplace the world countries have lowered their entry barriers to persuade a commodious amount of foreign subsidizes and generated FDI incentives to attract more foreign investment flows. Therefore, operations such as low taxes, attractive tariff regimes, and market preferences, investment in infrastructure, financial grants and loans for the foreign firms took the form of investment incentives. Basically, FDI incentives are similar in developed and developing regions. Regarding to UNSTAD (2001), a small number of regions put down for FDI activities without subsidies nowadays. This promulgate estimates that 95 per cent of adjustments in FDI legislations for the 1990s were encouraging to foreign companies and furthermore, these a djustments followed by FDI promotions and incentives. The motivation of such reasons primarily tended by prospect of sightedness exacting spillovers inflows into host economies UNSTAD (2001).In the context of positive spillovers host governments tries to attract foreign subsidizes to their economies as they considers that FDIs spillovers generate positive externalities to the domestic companies by transferring know-how and advanced technology. The spare-time activity terms can be implementedDomestic companies might benefit from foreign production processes as they fan out new technologies. It can be implemented through labour derangement and through imitation.As the foreign firms gain access into domestic market equilibrium, it is makes domestic companies to be more an incentive to protect market shares income (Ponomareva, 2000).These systematic alterations might cause various sorts of spillovers that bring to productivity growth into domestic companies, as the spillovers effec ts from foreign companies can be significant. On the other hand, several literatures provided that spillovers effects can have negative forms. In article by Aitken and Harrison (1999) the negative impacts of spillovers introduced on the domestic firms productivity, in terms of market steeling effect. For example, when the foreign company gain access to the foreign market and take over local market shares by its technology advantages. In other words, the MNEs advantages can simply trough out domestic firms productivities and so, local companys productivity declines.3.2. Spillover activities and types.There is a large empirical study that implements the significance of spillover activities in the host economies. According to Blomstrom and Kokko (1997), the importance of the FDI spillovers is not only the investment in a new plant and equipment, but in any case transfers of technology, skills and capital for the host countries. Consequently, FDI arrives through managerial and financia l resources, technical support and strategic assets. This can be companys steel name that takes place by comparative advantage to domestic entrepreneurs. Spillover activities can be taken during foreign companies presence that provides efficiency and productivity to the domestic firms. The positive spillovers followed by foreign investment enterprises that provide benefits to domestic companies, in terms of productivity technologies that do not beat cost for gains (UN-ECE, 2001).In the perspective of the FDI spillovers, several policymakers have concerned that the presence of foreign firms lead to productivity growth of domestic companies. Whereas, other authors implemented that, there is besides a negative impact of FDI spillovers. One of the jet explanations of FDI in transition regions is assistance in restructuring domestic firms. As Wallner (1998) suggest that, partly an emerging firm occurs under the soft budget simpleness and thereby FDIs activity might provide in a posi tive way. As the presence of the foreign firms provide various incentives to reduce finances to domestic companies and as a result involves in companies restructuring. Another positive feature of FDI spillovers importance is transfer of technology and know-how to domestic firms. On the other hand, this can also provide negative spillovers. For instance, in terms of product market under imperfect competition, that can follow by a considerable decrease of the market shares of the local firms and moreover, can trough out domestic firms from the market. The literature by De Gregorio and Lee (1998) and Kokko and Borensztien (1994) give tongue to that FDI spillovers can generate in positive way, if only the technology development among foreign and domestic company is not so great. The trends of positive spillovers were found in the following(a) literatures Blomstrom, Sjoholm (1999) in Indonesia, Caves (1974) in Australia and Globerman (1979) in Canada. In the case of negative spillovers the following studies such as Kornings (1999) in Poland and Romania and Aitken and Harrison (1999) in Venezuela have implemented such effectsSpillover activities determine two draw neares such as direct and substantiative approach. The direct approach examines through statistical examples, as the spillover activities are directly correlated to presence of foreign firms (Blomstrom et.al.1999). The purpose of the direct approach oftentimes leads to productivity measure of local firms to the MNEs presences. There is on common method acting that utilizes evaluation of production functions that estimates through the foreign firms presences upon industry productivities and on its levels. In studies of econometric the spillover activities might expose the contribute impact of productivity to host firms under the foreign presence. However, the impacts are much not specific nor implement its effects (Blomstrom and Kokko 2003). The confirming approach examines through channels in which FDI spillovers may take in, and afterwards estimate the forcefulness of those channels. Likewise direct approach, there is a large studies on its channels, but it can be unenviable to implement general conclusion from these studies (Blomstrom et.al.1999).Another spillover activity in the host industries persuaded by two types such as inter ( erect) and intra ( swimming) industry spillovers. The just spillovers appear when foreign company provide impacts to the domestic suppliers. This can be under different industries that engaged in a long term contract among foreign company and a domestic supplier (Smarzynka, 2002). The horizontal spillovers result from the item of the MNEs that brings competition to the host economy. There are five channels that chase horizontal spillover activities such as competition, transfer of technology and RD, industrial management, materialisation and imitation activities and human capital and labour overthrow (Blomstrom et. at. 1999). According to UNECE work (2001), on intra industry spillovers in transition regions have estimated FDIs horizontal and vertical impacts. The following (Table 2) estimated that basically the presences of foreign companies did not perform better and thus, they have not generated the expected positive spillovers to local companies.Virtually, the FDI spillovers moody to be negative in these manufacturing regions. Generally, CEE regions were under negative coefficient performances. The exception was followed with Estonias and Russias manufactures which are presented positive coefficients. The results suggested that it is not unexpected as the initial conditions and economic environment was critical during the transition period. Those countries essentially had undergo various shocks and thus, local companies were not capable to react to the challenges that followed by FDI. This however, can be temporary factors and these regions will be more competitive with the next FDI flows.3.3. FDI flows in tran sition economies.Over the decade agone the author Soviet Countries and central and eastern europium regions have been transferred themselves from centrally planned system to open market economy. This general transformation has seen a massive upsurge in FDI inflows that afterwards back up to be cured _or_ healedy their internal economic vulnerabilities. As the initial stages of economy conditions experienced several economic shocks and therefore domestic growth of these regions went down. According to UNECE report (2001) the industrial productivity decreased by 34 per cent over the transition regions. Furthermore, in some regions it even followed by 64 per cent. This economic collapse was stated by macroeconomic imbalances, monetary overhangs, and by external debts. Consequently, these host regions were under extremely necessitate of liberalization, privatization and stabilization reforms that followed with the foreign subsidizes. There are strong evidences that FDI tends to boo st the initial stage of economic performances. The following trends were considered such as, FDI frequently helps to the host country to amalgamate into the global economy. FDI increases the aggregate rate of investment. FDI generates transformation of hard technology that process technology and product. FDI engenders motion of soft technology that processes organization, management and sourcing technologies FDI tends to encourage networking and subcontracting patterns that conducive for host firms to improve their technologies and productivities. (Dyker 1999)Thus, the importance of FDI in these regions was not only in supplying funds for the acquisition of new equipment, but also it seen transformation of advanced technology and organisational forms that led from more developed economies. Attracting FDI assets are considerable issue for the transition regions, as it leads to catch up policy with more developed economies by improving their economic efficiency. According to Transiti on Report (EBRD 2007), in the past decade the former soviet regions and central and eastern European countries have been successfully change their economic circumstances. As their living standards have change and moreover political, social, economic and legal issues were adopted and improved by state agencies. The transformation processes however implemented in different stage as their initial conditions were vary over all regions. Some of regions have simply been mistreated by foreign investors as the investment inflows directed more toward to some regions. (EBRD, 1999, Henriot, 2003) This divergency might be implemented by the high economic zing of more advanced transition economies. There are some regions that have been under the greater concern to investors due to of their mineral wealth resources, and close frontiers to the European Union countries. Moreover, in the last 10 years, it was obvious that foreign investors were in favour to a more stable political economy and to a favourable environment that had followed a unchanging privatization policy (Henriot, 2003). According to table the following four regions experienced a large amount of FDI flows.It is clearly seen that Hungarys state was dominant in foreign investment flows. Its economic condition was greater then in other regions and furthermore political relations with the western countries brought attention of foreigners. As the view of Hungary implemented effective infrastructure and economical ability to adopt foreign subsidizes. In addition, in its early sophisticated privatization strategy on state owned firms made favourable environment for foreign investors. Likewise FDI flows in Poland and Czechoslovakian democracy also had experienced a fast growth. This quick increase was experienced through acquisition of state owned enterprises that had refer foreign investors. The Slovaks FDI inflows entered posterior in contrast to Hungary, Poland and Czech Republic and therefore had the lowest rate. Although, in most cases its small sized enterprises were privatized by foreign investors. Through the government policy that could proceed with the well managed economic reforms and external relations with the neighbouring regions. The total stock of FDI inflows for country size by population and GDP analysed that Hungary and the Czech Republic have succeeded significantly then Poland and Slovak Republic. Nevertheless, these regions tended to recover faster in contrast to the CIS regions.In the perspective of CIS regions, FDI stocks remain with low attitudes, despite their performance in accomplishing macroeconomic policy and managing relatively high growth rate. (Table 2.1.) illustrates that regions such as Kazakhstan and Azerbaijan have chased the largest proportion of FDI stocks, whereas Tajikistan demo the lowest amount of FDI stocks.Similarly, shares of FDI stocks in GDP for Azerbaijan and Kazakhstan have performed better. In terms of per capita of FDI stocks, reg ions as Kyrgyzstan and Azerbaijan have performed worthily, whereas Uzbekistan and Azerbaijan turned with the lowest rate. In comparing the result of FDI stock levels of aboriginal European to Central Asian regions, the Republic of Kazakhstan, Azerbaijan and Russia were shown with the better perform attitudes. This impact followed with large inflows of FDI stocks in oil and gas fields. Nevertheless, these regions levels of FDI stocks are still little then in other central European regions. The case of such underperformance of the some CIS regions can be attributed by the tardiness in privatization, incapability and disinclination in reform strategies and inefficiencLocation Determinants of FDI in Transition RegionsLocation Determinants of FDI in Transition RegionsAn essential aspect of globalization in past period has been the progressing grows in foreign direct investment (FDI). According to assessments of UNCTAD (2000) experts estimation, since 1979 to 1999 the volume of the wor ld FDI funds to worlds GDP boosted by 16 per cent and relatively the proportion of world FDI streams increased by 14 per cent. Such a progressive expansion explains as the FDI determinants plays a leading role in development of any countrys economy, in terms of macro and micro parameters (Lipsey, 2001).Most of time FDI is provided with developed countrys strong market orientations to emerging countries, where market is weak. To expose most the effective conditions which are attracts FDI determinants in the host regions, a number of researches have been done. As a result of this study has cerebrate that there is a large impact on a market size, GNP and economic growth rather than investment incentives.However, the circumstances of FDI are various in each country because all of them have weak and strong markets and therefore have different outcomes of FDI stocks. The transition regions such as CIS and CEE regions have been recently studied comprehensively. There is a large empirical literatures implemented the FDI effects, as an engine machine for the transition regions. Due to advantages that related to the introduction of new technologies and innovations, new managerial techniques, development of additional skills, increased capitals, improvement of working conditions and the development of the industrial sectors in the transition regions (Caves, 1974 and Perez, 1997). Although, several policy makers viewed that FDI activities might provide negative effects on countrys economic development. This diversification followed by foreigners intensity in the host markets.The traditional debate stands for relationship among FDI and the prospects for economic growth.The study is divided into six parts. Chapter two will examine the results of several empirical studies of FDI activities, by examining series of positive and negative effects on the transition regions economies. Chapter three will review the mechanism of FDI activity by exampling its various types. Moreover , this chapter will briefly estimate FDI types affects on transition companies. Chapter four draws economic overview of the Kazakhstans market condition and the intensity of economy growth since the country gained its independence, and furthermore, will illustrate foreign direct investment environment. Chapter five contains FDI challenges and problems in the Kazakhstan oil and gas field industries, and will show government strategies against foreign investors. Finally, the last chapter will conclude with the summary and implications of the study.2. Literature reviewOver the past years the endowments of Foreign Direct Investment (FDI) are becoming to be very important issue for transition countries. As the FDI activities contribute certain volume of assistances to the national economic growth. However the issue of FDI activities are often stands to be as the implicit hypothesis, in terms of its flows that transports benefit to the host regions economy. The impact of such disputes gen erally depends on FDI forms behaviour that it takes. The several evidence of empirical literatures have drawn series of positive and negative features of FDI as a basis of assistance growth for transition regions, some of which are examined below.The article by Kozima ( ) has expressed a macroeconomic explication of the FDI behaviours. Kozimas observation analysed that FDI ought to operate as channel trade for the productivity goods and thereby its direction should be followed by the market forces rather than the micro level characteristics. The FDI flows transfer and promote productivity level growth in terms of technology, management skills and know-how from the developed industries to the developing industries. As the outcome of such investment types follow by the improvement of the welfare conditions and by the increase of the industries income. The case can describe the Japanese FDI activities in Asian regions. On the other hand, in some terms FDI activities correspond to negat ive effects of its location decisions. This presents the case of the presence of more technology advantaged foreign company in an emerging country, where domestic industry might not be comparatively competitive and efficient to compete with the advantaged foreign company. Therefore, the presence of more advantaged foreign company under such conditions can simply take over domestic firms market shares and decrease countrys economic welfare growth. The case explains by the United States FDI activities after the second war.De Gregorio (1992) stated that FDI may bring several benefits that persuade economic development by its advanced technologies and skilled knowledges, as such factors may promote productivity growth in emerging regions. De Gregorios studies have estimated several facts on economic growth in Latin America. This followed by increasing investment growth which is approximately implemented 0.6 per cent of GDP growth annually from 1950 to 1985. Likewise, Blomstrom and Lipse y (1992) examined FDIs positive externalities. However, such estimations studied under certain conditions that followed by high performed regions and therefore implemented positive performances. According to their studies, countries that only have attained certain level of returns can benefit from FDI activities. This can be correlated to human capitals that provide different income returns in transition regions. As well educated and skilled labour population can utilize the benefits of advanced technologies to the whole economy.The model of Malign emphasizes the potential interaction among FDI that realized by foreign company under the imperfectly competitive industry and a host region with imperfectly competitive domestic market. Hence the foreign firms operation in such market faces with several barriers to gain access into a market, and thus this increase market concentration instead of decreasing. (Cardoso and Dornbush 1989 Grieco 1986) In this term the presence of foreign comp any can simply turn down domestic savings and investment capacities by taking out rents and funds activity. Moreover, such case can basically trough out domestic firms from local business activities. The international firms might reinvest their capital flows to related industries in the host region and expand their market powers. The repatriation of such reinvestment profits may take out capital from the host region. Far from providing an encouraging impact on profits distribution and social environment improvements by foreigners might sustain a small power of local business partners and suppliers. As they utilize inappropriate intensive technology that might generate small number of labour forces, whereas consigning employees to the category of the unemployed, and this turns down them to set up more productive occupations. Their rigid control over advanced technology and skilled management channels may put off the favourable spillovers and externalities.It is commonly acknowledged that attracting FDI spillovers promote development effects, as the FDI activities symbolize as an essential source of technological spillovers, and as one of the resourceful and practical tools for improvement and upgrading of transition industries. (Dunning and Narula 2004) In fact, FDI spillovers have been enthusiastically supported under the Washington consensus as a universal remedy that leads economic growth and expansion. Because, structural changes highly amalgamate macroeconomic stabilization strategies along with strategies that increase FDI flows. However, the benefit levels are considerably various and the results from FDI assistances procedure are not always positive. (Lall and Narula 2004)Aitken and Harrison (1999) estimated the spillover effects to domestic companies in Venezuela. They investigated exceptionally limited effects of spillovers level. In addition, this spillover levels were mostly delivered from joint ventures. This suggested that relations among foreign and domestic company produce some amount of spillovers. However, its effects can not capture the whole economy. This can be explained when the foreign company in some way induced productivity growth but its financial sector would not be able to capture the plant stage, although it ought to capture even at the aggregate stage.The effects of political intensity have been examined by several policymakers and suggested that relationship among FDI inflows and host country firstly based on the political stability. Alesina and Perotti (1996) examined the impact of political vulnerabilities on economic development and investment. They implemented that an increase of the political intensity in the host region leads to decrease of investment flows. By implementing index of political instabilities that stands beyond of political assassinations, corruption and coups. Campos and Nugent (2002) analysed the causal linkages among investment and growth index by utilizing pooled panel statistics. Acc ording to their investigation results, it suggested that there are not so many evidences for the negative linkages among political instability and GDP growth. However, in terms of investment facilities, there are strong causalities of political vulnerability to investment decline.The relation among political volatility and asset markets has been examined by several policymakers. Robin, Liew and Stevens (1996) have examined factors of political volatility in transition regions. According to their analyses the importance of asset returns stands to be more significant in transition regions than in developing regions. As Bussiere and Mulder (1996) implemented their investigation in the twenty three regions and proposed that political vulnerabilities in economic models broadly explicate economic decline the aptitude of economic model to explicate economic decline of transition region. Moreover, they stated such conditions are vulnerable to economic crises when election consequences under uncertainty.Kutan and Zhou (1995) investigated that political intensity in Poland during 1990s had introduced economic reforms that influenced foreign exchange returns and bid-ask spreads. According to their investigation, these events reflected by political volatility that seriously harmed the national currency value in international exchange market. This consequently boosted the bid-ask spreads under the foreign exchange transactions that formulated bid-ask spreads to be more expensive for foreign investors. Likewise, Melvin and Tan (1996) examined political volatilities on foreign exchange market by their studies that implemented similar causes.Ivo Feierabend and Rosalind Feierabend (1966) formulated their Feieraben measure on political instability. This theory based on the countrys political vulnerabilities that considered the amount and concentration of political aggressiveness behaviour that takes place within a nation. According to their definition on political instability i t is the amount of Aggression directed by individual orgroups within the political system against other groupsor against the complex of officeholders and individualsand groups associated with them. Or, conversely, it isthe amount of aggression directed by these officeholdersagainst other individuals, groups, or officeholders withinthe polity.Using this characterization Feierabends have examined various indicate scales of political vulnerability that based on the amount and concentration of political actions. Feierabends have segregated thirty categories of political actions that were given by various weights. As the more destabilise actions, then the higher influences it obtains. For example, during the election of public servants is estimated to be zero, as this was not followed by aggressiveness of political intensity. However, in cases of assassination of high politic figures, corruptions and coups had estimated up to 5 and 7 scales.In the case of locational decision of foreign c ompanies the political intensity of host regions might lead them out off their domestic market. Aharoni (1960) and Thunell (1977) showed that the intensity of political instability might be very significant measure in the foreign investment activities in the way of location decision. This has been examined that foreign investors in general consider the political vulnerability of the host regions in an unsystematic way. However, a foreign company that operates abroad should put forward its attention on political intensity. This would facilitate in the formulation of tactic for choosing the location and expand further its investment flows. As in some circumstances the host governments might change their political intensity in terms of nationalization.3. The role of FDIsThe priorities of developing economies are obviously comprise under constant revenue growth for their economies through strengthening technological capabilities, increasing investment rates, and enhancing the competitiv eness of their production in the global marketplace. By providing the opportunities to economic growth, creating employment potentialities and conserving the environment for future population. As the globalisation and liberalization of the world economy constrains the developing economies to upgrade abilities and resources of their economies. The modern global can be classified by speedy progress in knowledge and economical capability under competitive circumstances. Therefore, in globalizing world the economic growth can be implemented constantly only if states can promote privileged value-added performances to supply goods and services for their open market strategies. Among these attitudes MNEs and FDI activities can apply for an essential function in complementing their efforts. As their assets is one of the main features of promoting local markets or entire enterprises to the international market.FDI has been characterized differently by several empirical literatures. The Inter national Monetary Fund (IMF) describes FDI as an investment made to acquire a lasting interest in a foreign enterprise with the purpose of having an effective voice in its management (Bjorvatn, 2000).Generally, FDI activities are undertaken by Multinational Enterprises (MNEs) that provide a huge capital of investment flows over the world. These investment flows classified as a market seeking, its purpose to serve for an existing market. For instance, owing to a high tariff rates, the company needs to relocate its activities to the emerging country, as firms activities were previously supplied by exporting. The motivation for such investment in the host economy explains in better serve for a local market through production, market growth and market size. The case of Japanese FDI in vehicle production in the US can be implemented as the market seeking (Duning, 1993).The efficiency seeking appears with a firm that involves in gaining economic scale and scope activities from the host ec onomy. In this perspective, close relations with the western countries would lead to corporate network linkages and the presence of high transport and communication costs will encourage more of efficiency-seeking FDI.Finally, the asset seeking or resource seeking occurs when a firm invest into a foreign country to find natural and low cost labour force resources that not available within their country. It might follow by natural resources, cheap labour forces and furthermore, by raw materials. Again the case of the UN and Japan can present the view of asset seeking by searching for a cheap labour force in Asia. In contrast to market seeking, it is able to serve for a home and for a third countrys market. This tendency follows particularly by industrialised sectors that subsidized by MNEs. Therefore, such accessibilities in physical infrastructure and skilled and cheap labour forces are the main trends of resource seeking.3.1. FDI typesIn analysing market entry through FDI flows, the re two choices such as, greenfield investment and takeover of an existing company. Through greenfield investments a company which invests a small amount of inputs, and afterwards when demand increases it can enlarge that investment. A greenfield investment frequently sets up from building a new company after the governments of host countries would approve that, because of the location perhaps can be in the profitable place and produce a new production capacity. In discussing other type of FDI is the takeover of an existing business through the acquisitions and mergers (MA). In other words, foreign companies appear in the emerging countries and purchases already existing local business by gaining the packages of the company, as a result, such companies turn out to be an affiliated. In the past years MA have seen massive surge by reaching more than 50 per cent (Theodore 1998).Admittedly, there are several trends that foreign firms seek to invest their capitals abroad. These features were partly analysed by Dunnings OLI theory. As Dunning (1993) describes three conditions that firms carry to take FDI activities. Ownership advantages- appears, when the foreign firm is capable to compete with the domestic firm. It can be attained through specific skills or assets that follow by advanced management and technological capabilities. Companies that endowed with ownership advantages basically enlarge their operations in a foreign country to internalize the growing benefits from ownership advantages. Location advantages- aspects as natural and mineral resources, transport costs and low prices, access to the domestic market determine the presence of the investment. Moreover, factors such as social and political stability and business environment that follows by stable prices and sustainable budget deficit determines location. Internalization advantages- occurs, when the foreign firm is able to retain its multiple activities, rather than licensing or franchising technology to local firms. The case can be implemented, when the firm prevents the technology or assets imitation by rival firms. According to OLI theory, all these criterions should be fulfilled for firms to invest in the host economies.In terms of investment incentives, Dunning (1993) pointed that OLI theory is generally stands for a characteristic of the host country and for the MNEs. This follows by attracted or specific location, skilled or cheap labour forces, infrastructure and political stability. Undoubtedly, these trends are very significant for the location of FDI assets, however, the significance of investment incentives have raised in the past years. Over the world countries have lowered their entry barriers to persuade a massive amount of foreign subsidizes and generated FDI incentives to attract more foreign investment flows. Therefore, operations such as low taxes, attractive tariff regimes, and market preferences, investment in infrastructure, financial grants and loans for t he foreign firms took the form of investment incentives. Basically, FDI incentives are similar in developed and developing regions. Regarding to UNSTAD (2001), a small number of regions participate for FDI activities without subsidies nowadays. This report estimates that 95 per cent of adjustments in FDI legislations for the 1990s were encouraging to foreign companies and furthermore, these adjustments followed by FDI promotions and incentives. The motivation of such reasons primarily tended by prospect of seeing positive spillovers inflows into host economies UNSTAD (2001).In the context of positive spillovers host governments tries to attract foreign subsidizes to their economies as they considers that FDIs spillovers generate positive externalities to the domestic companies by transferring know-how and advanced technology. The following terms can be implementedDomestic companies might benefit from foreign production processes as they diffuse new technologies. It can be implemente d through labour turnover and through imitation.As the foreign firms gain access into domestic market equilibrium, it is makes domestic companies to be more an incentive to protect market shares income (Ponomareva, 2000).These systematic alterations might cause various sorts of spillovers that bring to productivity growth into domestic companies, as the spillovers effects from foreign companies can be significant. On the other hand, several literatures provided that spillovers effects can have negative forms. In article by Aitken and Harrison (1999) the negative impacts of spillovers introduced on the domestic firms productivity, in terms of market steeling effect. For example, when the foreign company gain access to the foreign market and take over local market shares by its technology advantages. In other words, the MNEs advantages can simply trough out domestic firms productivities and so, local companys productivity declines.3.2. Spillover activities and types.There is a large e mpirical study that implements the significance of spillover activities in the host economies. According to Blomstrom and Kokko (1997), the importance of the FDI spillovers is not only the investment in a new plant and equipment, but also transfers of technology, skills and capital for the host countries. Consequently, FDI arrives through managerial and financial resources, technical support and strategic assets. This can be companys brand name that takes place by comparative advantage to domestic entrepreneurs. Spillover activities can be taken during foreign companies presence that provides efficiency and productivity to the domestic firms. The positive spillovers followed by foreign investment enterprises that provide benefits to domestic companies, in terms of productivity technologies that do not exhaust cost for gains (UN-ECE, 2001).In the perspective of the FDI spillovers, several policymakers have concerned that the presence of foreign firms lead to productivity growth of do mestic companies. Whereas, other authors implemented that, there is also a negative impact of FDI spillovers. One of the common explanations of FDI in transition regions is assistance in restructuring domestic firms. As Wallner (1998) suggest that, partly an emerging firm occurs under the soft budget constraint and thereby FDIs activity might provide in a positive way. As the presence of the foreign firms provide various incentives to reduce funds to domestic companies and as a result involves in companies restructuring. Another positive feature of FDI spillovers importance is transfer of technology and know-how to domestic firms. On the other hand, this can also provide negative spillovers. For instance, in terms of product market under imperfect competition, that can follow by a considerable decrease of the market shares of the local firms and moreover, can trough out domestic firms from the market. The literature by De Gregorio and Lee (1998) and Kokko and Borensztien (1994) stat ed that FDI spillovers can generate in positive way, if only the technology development among foreign and domestic company is not so great. The trends of positive spillovers were found in the next literatures Blomstrom, Sjoholm (1999) in Indonesia, Caves (1974) in Australia and Globerman (1979) in Canada. In the case of negative spillovers the following studies such as Kornings (1999) in Poland and Romania and Aitken and Harrison (1999) in Venezuela have implemented such effectsSpillover activities determine two approaches such as direct and indirect approach. The direct approach examines through statistical examples, as the spillover activities are directly correlated to presence of foreign firms (Blomstrom et.al.1999). The purpose of the direct approach frequently leads to productivity measure of local firms to the MNEs presences. There is on common method that utilizes evaluation of production functions that estimates through the foreign firms presences upon industry productiviti es and on its levels. In studies of econometric the spillover activities might expose the total impact of productivity to host firms under the foreign presence. However, the impacts are frequently not specific nor implement its effects (Blomstrom and Kokko 2003). The indirect approach examines through channels in which FDI spillovers may take in, and afterwards estimate the forcefulness of those channels. Likewise direct approach, there is a large studies on its channels, but it can be difficult to implement general conclusion from these studies (Blomstrom et.al.1999).Another spillover activity in the host industries persuaded by two types such as inter (vertical) and intra (horizontal) industry spillovers. The vertical spillovers appear when foreign company provide impacts to the domestic suppliers. This can be under different industries that engaged in a long term contract among foreign company and a domestic supplier (Smarzynka, 2002). The horizontal spillovers result from the oc currence of the MNEs that brings competition to the host economy. There are five channels that chase horizontal spillover activities such as competition, transfer of technology and RD, industrial management, demonstration and imitation activities and human capital and labour turnover (Blomstrom et. at. 1999). According to UNECE report (2001), on intra industry spillovers in transition regions have estimated FDIs horizontal and vertical impacts. The following (Table 2) estimated that basically the presences of foreign companies did not perform better and thus, they have not generated the expected positive spillovers to local companies.Virtually, the FDI spillovers turned to be negative in these manufacturing regions. Generally, CEE regions were under negative coefficient performances. The exception was followed with Estonias and Russias manufactures which are presented positive coefficients. The results suggested that it is not unexpected as the initial conditions and economic enviro nment was critical during the transition period. Those countries essentially had experienced various shocks and thus, local companies were not capable to react to the challenges that followed by FDI. This however, can be temporary factors and these regions will be more competitive with the next FDI flows.3.3. FDI flows in transition economies.Over the decade ago the former Soviet Countries and central and eastern Europe regions have been transferred themselves from centrally planned system to open market economy. This systemic transformation has seen a massive upsurge in FDI inflows that afterwards assisted to recovery their internal economic vulnerabilities. As the initial stages of economy conditions experienced several economic shocks and therefore domestic growth of these regions went down. According to UNECE report (2001) the industrial productivity decreased by 34 per cent over the transition regions. Furthermore, in some regions it even followed by 64 per cent. This economic collapse was stated by macroeconomic imbalances, monetary overhangs, and by external debts. Consequently, these host regions were under extremely necessitate of liberalization, privatization and stabilization reforms that followed with the foreign subsidizes. There are strong evidences that FDI tends to boost the initial stage of economic performances. The following trends were considered such as, FDI frequently helps to the host country to amalgamate into the global economy. FDI increases the aggregate rate of investment. FDI generates transformation of hard technology that process technology and product. FDI engenders relocation of soft technology that processes organization, management and sourcing technologies FDI tends to encourage networking and subcontracting patterns that conducive for host firms to improve their technologies and productivities. (Dyker 1999)Thus, the importance of FDI in these regions was not only in supplying funds for the acquisition of new equipment, but also it seen transformation of advanced technology and organisational forms that led from more developed economies. Attracting FDI assets are considerable issue for the transition regions, as it leads to catch up policy with more developed economies by improving their economic efficiency. According to Transition Report (EBRD 2007), in the past decade the former soviet regions and central and eastern European countries have been successfully stabilized their economic circumstances. As their living standards have improved and moreover political, social, economic and legal issues were adopted and improved by state agencies. The transformation processes however implemented in different stage as their initial conditions were varied over all regions. Some of regions have simply been mistreated by foreign investors as the investment inflows directed more toward to some regions. (EBRD, 1999, Henriot, 2003) This discrepancy might be implemented by the high economic dynamism of more advanced transition economies. There are some regions that have been under the greater concern to investors due to of their mineral wealth resources, and close frontiers to the European Union countries. Moreover, in the last 10 years, it was obvious that foreign investors were in favour to a more stable political economy and to a favourable environment that had followed a consistent privatization policy (Henriot, 2003). According to table the following four regions experienced a large amount of FDI flows.It is clearly seen that Hungarys state was dominant in foreign investment flows. Its economic condition was greater then in other regions and furthermore political relations with the western countries brought attention of foreigners. As the view of Hungary implemented beneficial infrastructure and economical ability to adopt foreign subsidizes. In addition, in its early sophisticated privatization strategy on state owned firms made favourable environment for foreign investors. Likewise FDI f lows in Poland and Czech Republic also had experienced a fast growth. This rapid increase was experienced through acquisition of state owned enterprises that had involved foreign investors. The Slovaks FDI inflows entered later in contrast to Hungary, Poland and Czech Republic and therefore had the lowest rate. Although, in most cases its small sized enterprises were privatized by foreign investors. Through the government policy that could proceed with the well managed economic reforms and external relations with the neighbouring regions. The total stock of FDI inflows for country size by population and GDP analysed that Hungary and the Czech Republic have succeeded significantly then Poland and Slovak Republic. Nevertheless, these regions tended to recover faster in contrast to the CIS regions.In the perspective of CIS regions, FDI stocks remain with low attitudes, despite their performance in accomplishing macroeconomic policy and managing relatively high growth rate. (Table 2.1.) illustrates that regions such as Kazakhstan and Azerbaijan have chased the largest proportion of FDI stocks, whereas Tajikistan demonstrated the lowest amount of FDI stocks.Similarly, shares of FDI stocks in GDP for Azerbaijan and Kazakhstan have performed better. In terms of per capita of FDI stocks, regions as Kyrgyzstan and Azerbaijan have performed worthily, whereas Uzbekistan and Azerbaijan turned with the lowest rate. In comparing the result of FDI stock levels of Central European to Central Asian regions, the Republic of Kazakhstan, Azerbaijan and Russia were shown with the better perform attitudes. This impact followed with large inflows of FDI stocks in oil and gas fields. Nevertheless, these regions levels of FDI stocks are still smaller then in other central European regions. The case of such underperformance of the some CIS regions can be attributed by the tardiness in privatization, incapability and disinclination in reform strategies and inefficienc