Institutional Development as a Determinant of FDI Attractiveness in Southeast Europe

Abstract

The aim of this paper is to research the institutional environment in SEE countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Montenegro, Romania and Serbia) and its importance in attracting FDI inflows. Several regression models are created to determine the significance of chosen location determinants. The models include institutional variables about the transition progress, government effectiveness, rule of law, corruption, but also variables about the economic characteristics of the SEE region such as GDP per capita, growth rate, inflation and wages. The results of the panel data analysis indicated the importance of economic determinants (GDP p.c. and inflation) to FDI inflows, while among institutional factors, only corruption, large scale privatisation, the development of trade and forex systems, and overall infrastructure reform have a significant impact on FDI inflows. Property rights freedom and small scale privatisation are not significant variables. When we reduce multicollinearity, we conclude that GDP p.c., inflation, the trade and forex systems, corruption and overall infrastructure reform remain significant variables in explaining the economic and institutional determinants of FDI inflows.;