Trade and Market Liberalisation in Eastern Europe: The Effects on the FDI Location Decisions of Italian Firms

The question of why multinational companies (MNCs) choose to locate in one region rather than another has been an important topic in IB research for many years, but has recently received even more attention. Such increased attention is well-merited as firms’ location decisions may well influence their modes of entry, their choice of foreign partner in joint ventures, and the subsequent performance of their foreign affiliates. This paper presents the results of an econometric investigation of the locational determinants of Italian firms in Eastern Europe. Italian firms have been very active investors in the CEE countries, and their investments have had substantial impacts upon the domestic economies. Our results broadly confirm the findings of previous studies, in that we find that local market size and market growth, labour availability, the quality of infrastructure and agglomeration economies are all important determinants. But the Eastern European setting has also enabled us to break new theoretical ground in testing for the effects of market and trade liberalisation. We find that both trade liberalisation and market liberalisation are important influences upon the location decision. If, and it is a question of ‘if’ because there are disadvantages as well as advantages from increased inward investment flows, the CEEC governments wish to attract further (Italian) foreign investment, then further liberalisation of the domestic economies should be a policy priority