U M NIVERSITY OF ACEDONIA Department of Balkan, Slavic and Oriental Studies FDI Determinants to Transition Countries. A CAGE Model Approach. The Case of Serbia. N G ATASA RUJIC A thesis submitted for the degree of Doctor of Philosophy in the Department of Balkan, Slavic and Oriental Studies of University of Macedonia Thessaloniki, Ferbuary 2018 FDI Determinant to Transition Countries. A CAGE Model Approach. The Case of Serbia. Supervisors: Dimitrios Kyrkilis Professor Dean of the Faculty of Economic and Regional Studies University of Macedonia Harry Papapanagos Professor Head of the Department of Balkan, Slavic and Oriental Studies University of Macedonia Athanasios Koulakiotis Assistant Professor Department of Balkan, Slavic and Oriental Studies University of Macedonia 1 “Ko zna sta te tamo ceka u maglama iz daleka. Al’ ako se i pozlatis, il’ sve tesko, gorko platis, uvek idi samo napred. Nemoj nikad da se vratis.” Posveceno mojim roditeljima To my parents 2 FOREWORD AND ACKNOWLEDGEMENTS This doctoral journey has been an interesting experience for me. During all this time, I have had the great fortune of meeting many inspiring people who have encouraged, motivated and guided me in my journey across the academic world. I would hereby like to thank them all for their generous support. First and foremost I want to thank my supervisor Professor Dimitrios Kyrkilis. I appreciate all his contributions of time, ideas, and funding to make my Ph.D. experience productive and stimulating. Mr. Kyrkilis encouraged me to explore domains of knowledge that were totally new for me, when I started the research process. I am also obliged to him, for all the opportunities he provided me to meet knowledgeable and interesting people by participating in international conferences in different countries. His guidance and support has been definitely precious during this whole process. I am especially thankful to my committee members. Firstly, to Professor Harry Papapanagos, who took time from his busy schedule to read my work and offered useful suggestions for its improvement. Then, I am highly grateful to Professor Athanasios Koulakiotis. It has been a fruitful learning experience for me to follow your recommendations in developing a model for my dissertation. I would also like to thank the other four members of my oral defence committee, Mrs. Konstantina Kottaridi, Mr. Yannis Hajidimitriou, Mr. Pantelis Pantelidis and Mr. Spyros Roukanas, for their time and insightful questions. The completion of this doctoral dissertation would not have been possible without the generous support and financing that I received from the Hellenic State Scholarship Foundation (I.K.Y). My parents, Nikola and Zorica Grujic, deserve special thanks for always supported me in this journey. Words can not express how grateful I am to my family. I love them so much, and I would not have made it this far without them. Also, I would like to specially mention my brother and my sister, and I know that they must be very happy on the completion of my doctoral degree. 3 Now, my thoughts turn to an important person in my life. Nikolaos! I feel lucky that I met you. Thank you for supporting me for everything, and especially I can’t thank you enough for encouraging me throughout this experience. I hope that God will be merciful on us and bless us with time and love in order to explore the journey of life and discover a future together. Natasa Grujic February 2018 Thessaloniki, Greece 4 CONTENTS CHAPTER I. Introduction 1.1. Globalization vs. Semiglobalization 11 1.2. A CAGE Model Approach 17 1.3. Scope of the Thesis 24 CHAPTER II. Theoretical Background 2.1. Theories of FDI 30 2.2. The Market Transaction Cost Approach 46 CHAPTER III. Foreign Direct Investment in Serbia 3.1. FDI in Serbia since 1990 54 3.2. Law on Foreign Investments in Serbia 58 3.3. FDI in Serbia: Stylized Facts 3.3.1. Distribution of FDI inflows to Serbia by manufacturing and services sectors 60 3.3.2. Distribution of FDI inflows to Serbia by home country 63 CHAPTER IV. Framework Analysis of “Distance”. Theory and Empirical Considerations 4.1. Framework Analysis of Cultural Distance 4.1.1. Cultural Frameworks 81 4.1.2. Hofstede’s Cultural Dimensions 82 4.1.3. Limitations of Hofstede’s model 83 4.1.4. Other Cultural Frameworks 84 4.1.5. Effects of National Cultural Differences 87 4.1.6. Variables of Cultural Distance 89 4.1.7. Hypothesis about the Relationship between Cultural Distance and FDI 92 4.2. Framework Analysis of Institutional Distance 4.2.1. Variables of Institutional Distance 98 4.2.2. Hypothesis about the Relationship between Institutional Distance and FDI 102 5 4.3. Framework Analysis of Geographic Distance 4.3.1. Variables of Geographic Distance 106 4.3.2. Hypothesis about the Relationship between Geographic Distance and FDI 109 4.4. Framework Analysis of Economic Distance 4.4.1. Variables of Economic Distance 110 4.4.2. Hypothesis about the Relationship between Economic Distance and FDI 112 4.5. Hypotheses about the relationship between Distances and FDI at industry level 114 CHAPTER V. Model, Methodology and Data 5.1. Construction of Approximations 117 5.2. Econometric Modeling 123 5.3. Data Sampling 125 CHAPTER VI. Empirical results 6.1. Country Level 130 6.2. Industry Level 131 CHAPTER VII. Conclusions 142 REFERENCES 164 6 LIST OF TABLES Tables- Chapter I Table 1.1. The CAGE framework at country and industry level 24 Table- Chapter III Table 3.1. FDI inflows, 2001-2007, millions of US Dollar 56 Table 3.2. FDI inflows by mode of entry, 2000-2014, millions of Euro 57 Table 3.3. FDI inflows, 2010-2016, millions of US Dollar 58 Table 3.4. Net FDI in cash by country of origin, 2000-2009, millions of US Dollar 64 Table 3.5. FDI inflows to Serbia, 2000-2012, millions of US Dollar 65 Table 3.6. FDI inflows to Serbia, 2000-2014, millions of Euro 66 Table 3.7. Russian OFDI in total, billions of US Dollar 72 Table- Chapter IV Table 4.1. World Bank Governance Data to measure ID 102 Table- Chapter V Table 5.1. Principal Component Analysis versus Exploratory Factor Analysis 118 Table 5.2. Factor Analysis/ Correlations 119 Table 5.3. Factor loadings (pattern matrix) and unique variance 119 Table 5.4. Factor Analysis/ Correlations 120 Table 5.5. Rotate factor loadings (pattern matrix) and unique variance 120 Table 5.6. Factor rotation matrix 120 Table 5.7. Scoring coefficients (method regression, varimax rotated factors) 121 Table 5.8. Aggregation of the manufacturing industry according to technological intensity and based on NACE Rev.2. 127 Table 5.9. High-tech knowledge-intensive services 128 7 Tables- Chapter VI Table 6.1.Linear regression at country level with Hofstede Type Cultural Index 130 Table 6.2. Linear regression at country level with Kogut-Singh Type Formula 131 Table 6.3. Linear regression for manufacturing sector with Hofstede Type Cultural Index 132 Table 6.4. Linear regression for manufacturing sector with Kogut-Singh Type Formula 132 Table 6.5. Linear regression for services sector with Hofstede Type Cultural Index133 Table 6.6. Linear regression for services sector with Kogut-Singh Type Formula 134 Table 6.7. Linear regression for medium-high technology industrial subsector with Hofstede Type Cultural Index 135 Table 6.8. Linear regression for medium-high technology industrial subsector with Kogut-Singh Type Formula 135 Table 6.9. Linear regression for low technology industrial subsector with Hofstede Type Cultural Index 136 Table 6.10. Linear regression for low technology industrial subsector with Kogut- Singh Type Formula 137 Table 6.11. Linear regression for low knowledge intensive service sector with Hofstede Type Cultural Index 138 Table 6.12. Linear regression for low knowledge intensive service sector with Kogut- Singh Type Formula 138 Table 6.13. Linear regression for high knowledge intensive service sector with Hofstede Type Cultural Index 139 Table 6.14. Linear regression for high knowledge intensive service sector with Kogut- Singh Type Formula 140 8 LIST OF FIGURES Figures- Chapter III Figure 3.1. FDI inflows to Serbia & Montenegro, 1992-2000, mill of US Dollar 55 Figure 3.2. FDI structure in Serbia for the period 2000-2009 57 Figure 3.3. FDI inflows to manufacturing and services sector 61 Figure 3.4. FDI inflows to manufacturing subsectors 62 Figure 3.5. FDI inflows to services subsectors 62 Figure 3.6. Austrian OFDI in total and to Serbia, millions of US Dollar 67 Figure 3.7. German OFDI in total and to Serbia, millions of US Dollar 69 Figure 3.8. Greek OFDI in total and to Serbia, millions of US Dollar 70 Figure 3.9. Italian OFDI in total and to Serbia, millions of US Dollar 71 Figure 3.10. USA OFDI in total, 2000-2013, billions of US Dollar 74 Figure 3.11. UAE OFDI in total, 2000-2013, millions of US Dollar 77 9