This paper studies the determinants of German direct investment in the Central and EasternEuropean countries during the period 1996–2016 using the augmented Knowledge Capital model toidentify the main reasons for foreign direct investment (FDI). The empirical results show increasingmultinational enterprise (MNE) activity with growth in country-size and with growing similarities ofcountries, which supports the horizontal reason for FDI; while the difference in the share of skilledlabor force associated with the vertical reason has no effect. Furthermore, the estimation results showunimportance of trade costs to the foreign market and the significance of the distance between sourceand host countries.
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