The impact of the institutional framework quality on the ownership strategy: Evidence from EU foreign direct investments in south and central eastern Europe

Abstract

Foreign Direct Investment (FDI) is considered by scholars as a critical factor for economic growth and development. The recent economic crisis in the European Union (EU) has brought up again the discussion of the key drivers specific to the attraction of FDI. In addition to strict economic factor, the literature emphasises the role of institutions in a country as determinants in attracting FDI inflows. This study is one of the first to address the ownership strategy of multinational enterprises from the EU region undertaking FDI in former transitional economies in South (SEE) and Central Eastern Europe (CEE) using the concept of the quality of institutions. An analysis of the impact that the quality of market supporting institutions in determining ownership structure has of foreign affiliates in former transitional economies is attempted using an econometric model on institutional, regulatory, country specific and company level data based on a sample of 285 EU companies undertook FDI in 4 South and Central Eastern European countries during 1995-2015. We apply and advance the institution-based view of strategy by integrating it with resource-based and transaction cost considerations, incorporating three of the most important theoretical paradigms of international business studies.