Institutional Factors affecting Investment Inflows in Transitional Countries

Abstract

This thesis investigates the relationship between institutional quality and the level of investment inflows in transitional countries from Central and Eastern Europe. We try to empirically verify the argument that institutional determinants are important in explaining the behavior of investment inflows in transition economies after 1990's. The role of institutions is being assessed using Worldwide Governance Indicators developed by Kaufmann. Consequently, in order to investigate the institutional quality progress specific for transition economies, we employ indicators developed by European Bank for Reconstruction and Development. Applying a panel-data set for ten countries in a period between 1996 and 2010, we conclude that there is a significant impact of institutional quality on investment inflows. In the regression benchmark performed with Kaufmann indicators, we managed to observe an indirect effect due to the fact that the information available on institutions is already incorporated in the macroeconomic variables. In the regression benchmark considering EBRD indicators, we managed to report a clear significance of the institutional determinants on the level of foreign investments. Keywords Foreign Direct Investment, Institutions, Institutional Determinants, Central and Eastern Europe,...