Friend or Foe? On the role of institutional reforms in the investment development path of Central and East European economies

Abstract

Many existing studies on emerging markets and firms have concentrated on the separate effects of institutional reforms and quality of the institutional infrastructure for attracting inward foreign direct investment (FDI) and fostering outward FDI. We argue that both these perspectives should be considered in an interplay, as there are links between inward and outward FDI in a country's economic development, which is captured by the investment development path (IDP) concept. Moreover, while predominant attention has been paid to emerging markets, little has so far been done to evaluate the sustainability of the institutional development, including later post-transition stages. We extend the IDP with insights from the institutional theory and conduct a comparative analysis of the effects of institutional reforms on IDP paths of ten Central and Eastern European (CEE) post-communist European Union (EU)-members. We find that while most of the studied post-transition economies follow a quadratic relationship between the net outward investment (NOI) position and each country's economic development, the role of institutional reforms is not in all cases accelerating the movement through the stages of the IDP. We attempt to explain the ambiguous role of institutions in an ensuing detailed discussion of the investigated countries.