New evidence on FDI determinants: An appraisal over the transition period

Abstract

The aim of this work is to provide new evidence on the factors that determine the flow of FDI among transition countries. The analysis takes into consideration the period of most intense transition and post-transition (1994-2002) of 26 former socialist countries. The empirical estimates enable us to draw two main conclusions: first classical locational FDI factors maintain their role in the context of transition countries, and, second, that FDI are influenced by specific market and institutional factors. Among market variables, relatively higher labour costs surprisingly do not constitute an obstacle for foreign investment. We find that variables reflecting market stabilising institutions play a more important role than those representing market creating institutions. Although, there is a certain tolerance of foreign investors towards weak institutional environment, we demonstrate that, to attract FDI, countries should reinforce their macroeconomic stability by focusing on market stabilising institutions.