Does Perception of Business Climate Differ Between Foreign and Local Investors? A Firm-level Study of Transition Economies in Eastern Europe and Central Asia

Abstract

Difference between foreign and local investors in their respective assessments of business climate constraints has not yet been given much attention in research literature. Drawing on institutional theory and the concept of liability of foreignness (LoF), the study contributes towards filling this gap in the context of business climate variables faced by foreign firms operating in transition economies. The Mann-Whitney U Test is applied to firm-level data of 30 transition economies in Eastern Europe and Central Asia. We found that foreign investors experience less trouble with access to finance, tax rate and competition towards the informal sector compared with domestic firms. Conversely, such variables as courts, custom and trade regulations, inadequate workforce, and labor regulations disturbed foreign investors more than local companies. LoF appears as a balanced outcome of firm-specific advantages, possessed by foreign investors, and location and institutional advantages, utilized by the local companies. The results point towards important possible synergies in enhancing the business climate in transition economies by policy-makers, and to potential conflict between policy reforms accommodating the interests of foreign capital against those of domestic firms.