Towards sustainable economic development: estimation of institutions’ role in FDI attraction

Purpose – In recent years Foreign Direct Investment (FDI) has attained significant importance as instrument for accelerating growth and development of countries. The role played by FDI in economic growth of various economies drew the attention of researchers and policy makers to explore the FDI led growth linkage and identify the push and pull factors of FDI destinations. Scientists try to find out which of factor plays a key role in attracting FDI. In presented paper authors raise and verify hypothesis about the importance of the institutions as the factor attracting FDI. Design / methodology / approach – For analyses eleven countries from different Europe regions, but similar in sizes or historical past has been chosen: Austria, Belgium, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Netherlands, Romania, Slovakia and Slovenia. These countries reflect three different regions of the Europe according to the proportionately similar investment figures. These regions are West Europe countries, Baltic countries and Central Eastern Europe countries. Due to availability of data period between 1995 and 2010 has been chosen. The empirical analysis is based on a regression model. Findings – Hypothesis - The better the institutional arrangement in a host country, the higher inward-FDI – was verified for Estonia, Romania and Slovakia, while Austria, Belgium, Bulgaria, Hungary, Latvia, Lithuania, Slovenia got insignificant coefficients of regression and for Netherlands relationship is significant, but negative. Research limitations / implications – For further research a wider range of countries should be included in the analyses and different type of institutional indicators might be used. It needs to be indicated, that institutional factors represent only one group of factors impacting FDI flow. Other factors, which are not considered in the presented research, may impact FDI flows as well. Hence, that complex impact of various factors cannot be untangled, hence serves as research limitation. Practical implications – In order to generate effective policies in the field of FDI attraction, it is important to identify the push and pull factors of FDI destinations, to find out the main factors which play a key role in attracting FDI. Efficient economic policies are seen as practical implication of the research. Originality / Value – This article contributes to the growing research in the field of identifying the main factors, which play the major role in FDI attracting. The findings indicate that relationships between of institutional quality and FDI inflow can be rather different in different countries, so claim about crucial role of institutions is not verified for all cases, and hence, has to be considered as context sensitive