Institutional Reform and Locational Advantages of New EU Member Central and Eastern European Countries for Foreign Direct Investment

Abstract

This paper basically seeks to assess both empirically and theoretically the significance of institutional infrastructure and its development as a determinant of Foreign Direct Investment (FDI) inflows into new EU member Central and Eastern European countries (CEECs). By providing empirical evidence, it intends to show that the upgraded quality of institutional infrastructure is significantly and positively related to inward FDI into the CEECs. With this aim, this study draws on several synthesized institutional factors that are particularly relevant for attracting FDI such as: 1) the degree of privatisation; 2) the quality of market and trade systems; 3) the quality of financial institutions; 4) the quality of infrastructure and 5) the degree of political stability. Empirical evidence strongly suggests that countries with a better performance in institutional reform take pole position in attracting inward direct investment. This study considers the ‘support of the EU’ as an important catalyst for institutional reform of the new member CEECs.