Economic Institutions and the Location Strategies of European Multinationals in their Geographic Neighborhood

Abstract

abstractThis article investigates how the location behavior of multinational enterprises (MNEs) is shaped by the economic institutions of the host countries. The analysis covers a wide set of geographically proximate economies with different degrees of integration with the old fifteen European Union members: new member states, accession and candidate countries, as well as European Neighborhood Policy countries and the Russian Federation. The article aims to shed new light on the heterogeneity of MNE preferences for the host countries’ regulatory settings (including labor market and business regulation), legal aspects (i.e., protection of property rights and contract enforcement), and the weight of the government in the economy. By employing data on 6888 greenfield investment projects, the random-coefficient mixed logit analysis shows that, although the quality of the national institutional framework is generally beneficial for the attraction of foreign investment, MNEs’ preferences over economic institutions are highly heterogeneous across sectors and business functions.