External Liberalization and Foreign Presence: Cross-Industry Evidence from Central Europe

Abstract

External liberalization-the relaxation of restrictions on cross-border trade and inbound direct investment-has played an important role in the programs of economic transition in central Europe. While liberalization is widely heralded, there has been little empirical analysis of the links between liberalization and industry structure, or of the role that foreign firms play in the transition process. This analysis examines changes in foreign presence following external liberalization in Poland and Hungary. I show that the presence of proprietary and intangible assets explains much of the cross-industry variation in patterns of foreign presence and, for a given level of foreign presence, whether this will occur via trade or inbound direct investment.

JEL Classification: L16, L6, O12