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Foreign investment location and institutional development in transition economies

Bevan, A, Estrin, Saul ORCID: 0000-0002-3447-8593 and Meyer, Klaus (2004) Foreign investment location and institutional development in transition economies. International Business Review, 13 (1). pp. 43-64. ISSN 0969-5931

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Identification Number: 10.1016/j.ibusrev.2003.05.005


nstitutions are widely regarded as a crucial locational advantage of host countries aiming to attract foreign investors. However, there is little agreement on which institutions matter, and why. This study contributes to filling this gap by analyzing the impact of different dimensions of the newly created institutional framework in East European transition economies on foreign direct investment (FDI). Using a dataset detailing FDI flows from individual market economies to transition ones, we examine the relationship between institutional development and FDI inflow. We find that FDI is positively related to the quality of formal institutions, though an impact from informal institutions can only be shown for the special case of Russia, which has suffered from a gap between the extensiveness and effectiveness of legal reform. Several specific formal institutions are found to influence FDI: private ownership of business, banking sector reform, foreign exchange and trade liberalization, and legal development. Conversely, domestic price liberalization, non-bank financial sector development and competition policy do not enhance FDI. These results point to important complementarities, but also potential conflicts, between policy reform and the interest of multinational firms.

Item Type: Article
Official URL:
Additional Information: © 2004 Pergamon
Divisions: LSE
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
Date Deposited: 13 Aug 2008 09:02
Last Modified: 26 May 2024 21:09

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