IDEAS home Printed from https://ideas.repec.org/a/eee/iburev/v13y2004i1p43-64.html
   My bibliography  Save this article

Foreign investment location and institutional development in transition economies

Author

Listed:
  • Bevan, Alan
  • Estrin, Saul
  • Meyer, Klaus

Abstract

Institutions 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.

Suggested Citation

  • Bevan, Alan & Estrin, Saul & Meyer, Klaus, 2004. "Foreign investment location and institutional development in transition economies," International Business Review, Elsevier, vol. 13(1), pages 43-64, February.
    • Handle: RePEc:eee:iburev:v:13:y:2004:i:1:p:43-64
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0969593103001082
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lansbury, Melanie & Pain, Nigel & Smidkova, Katerina, 1996. "Foreign Direct Investment in Central Europe Since 1990: An Econometric Study," National Institute Economic Review, National Institute of Economic and Social Research, vol. 156, pages 104-114, May.
    2. Paul Brenton & Francesca Di Mauro & Matthias Lücke, 2014. "Economic Integration and FDI: An Empirical Analysis off Foreign Investment in the EU and in Central and Eastern Europe," World Scientific Book Chapters, in: INTERNATIONAL TRADE, DISTRIBUTION AND DEVELOPMENT Empirical Studies of Trade Policies, chapter 7, pages 125-151, World Scientific Publishing Co. Pte. Ltd..
    3. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-544, September.
    4. Daphne Yiu & Shige Makino, 2002. "The Choice Between Joint Venture and Wholly Owned Subsidiary: An Institutional Perspective," Organization Science, INFORMS, vol. 13(6), pages 667-683, December.
    5. Rajneesh Narula & John Dunning, 2000. "Industrial Development, Globalization and Multinational Enterprises: New Realities for Developing Countries," Oxford Development Studies, Taylor & Francis Journals, vol. 28(2), pages 141-167.
    6. Laura Resmini, 2000. "The Determinants of Foreign Direct Investment in the CEECs: New evidence from sectoral patterns," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(3), pages 665-689, November.
    7. Philip Stevens, 2002. "The Role of Efficiency as an Explanation of International Income Differences," National Institute of Economic and Social Research (NIESR) Discussion Papers 205, National Institute of Economic and Social Research.
    8. J. Stiglitz, 1999. "Whither Reform? Ten Years of the Transition," Voprosy Ekonomiki, NP Voprosy Ekonomiki, vol. 7.
    9. Klaus E Meyer, 2001. "Institutions, Transaction Costs, and Entry Mode Choice in Eastern Europe," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 32(2), pages 357-367, June.
    10. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
    11. Ramamurti, Ravi, 2000. "Risks and rewards in the globalization of telecommunications in emerging economies," Journal of World Business, Elsevier, vol. 35(2), pages 149-170, July.
    12. Martín, Carmela & Velazquez, Francisco J, 1997. "The Determining Factors of Foreign Direct Investment in Spain and the rest of the OECD: Lessons for CEECs," CEPR Discussion Papers 1637, C.E.P.R. Discussion Papers.
    13. Oxley, Joanne E., 1999. "Institutional environment and the mechanisms of governance: the impact of intellectual property protection on the structure of inter-firm alliances," Journal of Economic Behavior & Organization, Elsevier, vol. 38(3), pages 283-309, March.
    14. John H Dunning, 1998. "Location and the Multinational Enterprise: A Neglected Factor?," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 29(1), pages 45-66, March.
    15. Antal-Mokos,Zoltan, 1998. "Privatisation, Politics, and Economic Performance in Hungary," Cambridge Books, Cambridge University Press, number 9780521593397.
    16. Christine Oliver, 1997. "Sustainable competitive advantage: combining institutional and resource‐based views," Strategic Management Journal, Wiley Blackwell, vol. 18(9), pages 697-713, October.
    17. Klaus E. Meyer, 1998. "Direct Investment in Economies in Transition," Books, Edward Elgar Publishing, number 1413.
    18. repec:sae:niesru:v:156:y::i:1:p:104-114 is not listed on IDEAS
    19. Mudambi, Ram & Navarra, Pietro, 2002. "Institutions and internation business: a theoretical overview," International Business Review, Elsevier, vol. 11(6), pages 635-646, December.
    20. Hans‐Peter Lankes & A. J. Venables, 1996. "Foreign direct investment in economic transition: the changing pattern of investments," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(2), pages 331-347, October.
    21. Bruce Kogut, 2002. "Capital market development and mass privatization are logical contradictions: lessons from Russia and the Czech Republic," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 11(1), pages 1-37, February.
    22. Henisz, Witold J, 2000. "The Institutional Environment for Multinational Investment," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 16(2), pages 334-364, October.
    23. Nigel Pain & Dawn Holland, 1998. "The Diffusion Of Innovations In Central And Eastern Europe: A Study Of The Determinants And Impact O," National Institute of Economic and Social Research (NIESR) Discussion Papers 137, National Institute of Economic and Social Research.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stoian, Carmen & Filippaios, Fragkiskos, 2008. "Dunning's eclectic paradigm: A holistic, yet context specific framework for analysing the determinants of outward FDI: Evidence from international Greek investments," International Business Review, Elsevier, vol. 17(3), pages 349-367, June.
    2. repec:rdg:wpaper:em-dp2004-14 is not listed on IDEAS
    3. Bellak, Christian & Leibrecht, Markus & Riedl, Aleksandra, 2008. "Labour costs and FDI flows into Central and Eastern European Countries: A survey of the literature and empirical evidence," Structural Change and Economic Dynamics, Elsevier, vol. 19(1), pages 17-37, March.
    4. Klaus E. Meyer & Hung Vo Nguyen, 2005. "Foreign Investment Strategies and Sub‐national Institutions in Emerging Markets: Evidence from Vietnam," Journal of Management Studies, Wiley Blackwell, vol. 42(1), pages 63-93, January.
    5. Azam, Muhammad & Khan, Hashim & Hunjra, Ahmed Imran & Ahmad, H. Mushtaq & Chani, Muhammad Irfan, 2011. "Institutions, macroeconomic policy and foreign direct investment: South Asian countries case," MPRA Paper 32480, University Library of Munich, Germany.
    6. Cuervo-Cazurra, Alvaro, 2008. "Better the devil you don't know: Types of corruption and FDI in transition economies," Journal of International Management, Elsevier, vol. 14(1), pages 12-27, March.
    7. Li, Xiaoying & Sun, Laixiang, 2017. "How do sub-national institutional constraints impact foreign firm performance?," International Business Review, Elsevier, vol. 26(3), pages 555-565.
    8. Ramona Jimborean & Anna Kelber, 2017. "Foreign Direct Investment Drivers and Growth in Central and Eastern Europe in the Aftermath of the 2007 Global Financial Crisis," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(1), pages 23-54, March.
    9. Cai, Huifen & Boateng, Agyenim & Guney, Yilmaz, 2019. "Host country institutions and firm-level R&D influences: An analysis of European Union FDI in China," Research in International Business and Finance, Elsevier, vol. 47(C), pages 311-326.
    10. Jisun Yu & Seung-Hyun Lee & Kunsoo Han, 2015. "FDI motives, market governance, and ownership choice of MNEs: A study of Malaysia and Thailand from an incomplete contracting perspective," Asia Pacific Journal of Management, Springer, vol. 32(2), pages 335-362, June.
    11. Norifumi Kawai, 2011. "The Role of Institutional Conditions in Japanese FDI in European Transition Economies," Chapters, in: Werner Pascha & Cornelia Storz & Markus Taube (ed.), Institutional Variety in East Asia, chapter 11, Edward Elgar Publishing.
    12. Hanhee Lee, 2015. "Foreign Direct Investment In North Korea And The Effect Of Special Economic Zones: Learning From Transition Economies," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 40(2), pages 35-56, June.
    13. Fathi Ali & Norbert Fiess & Ronald MacDonald, 2010. "Do Institutions Matter for Foreign Direct Investment?," Open Economies Review, Springer, vol. 21(2), pages 201-219, April.
    14. Schwieren, C.A.A. & Vendrik, M.C.M. & de Gijsel, P.P., 2004. "The power of competition: reducing or reinforcing discrimination?," Research Memorandum 041, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    15. Giammanco, Maria Daniela & Gitto, Lara, 2019. "Health expenditure and FDI in Europe," Economic Analysis and Policy, Elsevier, vol. 62(C), pages 255-267.
    16. Agnieszka Chidlow & Stephen Young, 2008. "Regional Determinants of FDI Distribution in Poland," William Davidson Institute Working Papers Series wp943, William Davidson Institute at the University of Michigan.
    17. Jun, Jong-Kun & Hyun, Jae Hoon, 2014. "Anticipation or risk aversion? The effects of the EU enlargement on Korean trade and FDI activities in Central and Eastern Europe," Journal of East European Management Studies, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 19(4), pages 486-503.
    18. Bevan, Alan A. & Estrin, Saul, 2004. "The determinants of foreign direct investment into European transition economies," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 775-787, December.
    19. Godinez, Jose R. & Liu, Ling, 2015. "Corruption distance and FDI flows into Latin America," International Business Review, Elsevier, vol. 24(1), pages 33-42.
    20. Aurora Galego & Isabel Vieira & Carlos Vieira, 2003. "The CEECs as FDI attractors: are they a menace to the EU periphery?," Economics Working Papers 4_2003, University of Évora, Department of Economics (Portugal).
    21. Demekas, Dimitri G. & Horvath, Balazs & Ribakova, Elina & Wu, Yi, 2007. "Foreign direct investment in European transition economies--The role of policies," Journal of Comparative Economics, Elsevier, vol. 35(2), pages 369-386, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:iburev:v:13:y:2004:i:1:p:43-64. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/133/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.