FDI as Signal for Competitive Advantage : Does Financial Sector FDI Attract Real Sector FDI, Portfolio Investment and Trade?

Does financial sector foreign direct investment (FSFDI) provide positive signals (Spence, 1973) for economic development or quot;crowd outquot; trade and investment? While there is a growing body of literature on the direct effects of foreign bank investment in Central, Eastern and South-Eastern Europe, indirect effects triggered by the massive FSFDI inflows have received little attention. To fill this gap, we review the literature on possible links between FSDI, foreign trade, real sector FDI and foreign portfolio investment and provide descriptive data. Applying regression analysis over 1999-2005, we find coherence between FSFDI and the level of real sector FDI and (to a lesser extent) trade in Bulgaria and Croatia. We argue that the relative impact of financial sector FDI, real sector FDI, foreign portfolio investment and trade need to be taken into consideration in shaping economic policies