The impact of Institutional Distance on FDI inflows in the Czech Republic

Abstract

This paper studies the impact of institutional distance on FDI infl ows in a specifi c country, theCzech Republic. This study contributes to the literature on the importance of institutional distancebetween home and host country among the factors able to infl uence FDI. The novelty of our paperis that (1) we consider whether institutional distance matters also when the host country is alreadyendowed with institutional standards relatively close to those of the main home countries of MNEs,and (2) we run separate investigations of home-host countries’ institutional distance, distinguishingbetween institutionally safer and less safe home countries in comparison with the host ones. TheCzech Republic has been chosen in view of these perspectives, as (1) it has traditionally beenconsidered as one of the most developed markets among those emerged from the socialistexperience, its level of institutional development is close to that of the various home countriesof MNEs, and (2) besides hosting MNEs from home countries endowed with safer institutions,it receives a certain amount of FDI also from countries with a relatively less safe institutionalenvironment. Our results challenge the previous literature, in the sense that institutional distancemay actually be perceived as an opportunity, especially by MNEs from home countries with higherlevels of institutional development. Indeed, MNEs from home countries with less safe institutionsthan Czech ones follow a more ambiguous pattern.