Institutional Development as a Determinant of FDI Attractiveness in Southeast Europe

Abstract

The aim of this paper is to research the institutionalenvironment in SEE countries (Albania, Bosnia andHerzegovina, Bulgaria, Croatia, Macedonia, Montenegro,Romania and Serbia) and its importance in attracting FDIinflows. Several regression models are created to determinethe significance of chosen location determinants. The modelsinclude institutional variables about the transition progress,government effectiveness, rule of law, corruption, but alsovariables about the economic characteristics of the SEEregion such as GDP per capita, growth rate, inflation andwages. The results of the panel data analysis indicated theimportance of economic determinants (GDP p.c. andinflation) to FDI inflows, while among institutional factors,only corruption, large scale privatisation, the development oftrade and forex systems, and overall infrastructure reformhave a significant impact on FDI inflows. Property rightsfreedom and small scale privatisation are not significantvariables. When we reduce multicollinearity, weconclude that GDP p.c., inflation, the trade andforex systems, corruption and overall infrastructurereform remain significant variables in explaining theeconomic and institutional determinants of FDI inflows.