Foreign direct investment (FDI) has become one of the main drivers of globalization and integration of the European transition economies into the world economy, especially the European Union. Its growth enhancing capacity has played a significant role in transforming their competitiveness, both locally and on international markets, and its propensity to stimulate institution buliding is changing both economic and political landscapes in the region. The economic conditionality of FDI and the EU access-driven reforms are working hand in hand in helping the goals of transition and the convergence process. The achievement of both goals is seen as the best guarantor of peace and security in the region.

Following the economic and political reforms international private capital started flowing into the emerging market economies of Central and Eastern Europe reducing the official capital flows to the region. The composition of private capital flows showed continuous dominance of direct equity investment but, with the perceptions of risk changing, portfolio capital also made its way into the transition economies. Both types of flows caused significant changes in the domestic financial markets. In this paper, after reviewing the composition and direction of international private capital flows, we focus on the effects that the international private capital flows had on the Croatian banking industry as well as how they helped shape its stock market. We conclude with some insights and dilemmas regarding the desirable degree of openness of the capital accounts with regard to the trade-off between growth and stability in the long run.