New Institutional Economics and FDI Location in Central and Eastern Europe

This chapter demonstrates that institutions matter in the context of foreign direct investment (FDI) in the transitional economies of Central and Eastern Europe (CEE). It employs the new institutional economics (NIE) as a theoretical foundation and applies related concepts in an examination of FDI activity that may respond to institutional development in CEE. It shows that the flow of FDI into the transitional economies of CEE tends to follow patterns similar to those in other emerging markets, with the added dimension that institutional factors appear to play a larger role than elsewhere. In particular, bilateral investment treaties, the degree of enterprise reform, and repatriation rules tend to stimulate FDI, while political risk and the level of corruption in government tend to constrain FDI into these countries. This outcome provides strong support for this reasoning based on the new institutional economics.