Spatial econometric analysis of determinants and strategies of FDI in Russian regions in pre- and post-1998 financial crisis periods

Abstract

Using a spatial autoregressive model of cross-sectional and panel data, we study the determinants and dominant strategies of FDI inflows into Russia before and after the 1998 financial crisis. The important determinants of FDI inflows into Russian regions since transition began appear to be market size, the presence of large cities and sea ports, oil and gas availability, and political and legislative risks. Since 1998, it appears the importance of big cities, the Sakhalin region, oil and gas resources and legislation risk has increased, while the importance of political risk and port availability has decreased. Our results also reveal a shift from horizontal FDI strategy to a regional trade-platform FDI strategy. While theory anticipates combined vertical and horizontal motives for regional trade-platform strategies, the lack of evidence of a vertical motive in the Russian case suggests import substitution presently plays a significant role in regional trade-platform FDI. Using a multiple spatial lags approach, we show that neighbouring regions with ports have emerged post-crisis as competitors for FDI and identify agglomeration effects in FDI between adjacent regions with and without ports during the period 1999-2002. Keywords: Foreign Direct Investment, Russian regions, FDI strategy, spatial autoregressive model JEL classification: F21, E22, C21