The impact of Institutional Distance on FDI inflows in the Czech Republic

Abstract

This paper studies the impact of institutional distance on FDI infl ows in a specifi c country, the Czech Republic. This study contributes to the literature on the importance of institutional distance between home and host country among the factors able to infl uence FDI. The novelty of our paper is that (1) we consider whether institutional distance matters also when the host country is already endowed with institutional standards relatively close to those of the main home countries of MNEs, and (2) we run separate investigations of home-host countries’ institutional distance, distinguishing between institutionally safer and less safe home countries in comparison with the host ones. The Czech Republic has been chosen in view of these perspectives, as (1) it has traditionally been considered as one of the most developed markets among those emerged from the socialist experience, its level of institutional development is close to that of the various home countries of MNEs, and (2) besides hosting MNEs from home countries endowed with safer institutions, it receives a certain amount of FDI also from countries with a relatively less safe institutional environment. Our results challenge the previous literature, in the sense that institutional distance may actually be perceived as an opportunity, especially by MNEs from home countries with higher levels of institutional development. Indeed, MNEs from home countries with less safe institutions than Czech ones follow a more ambiguous pattern.