Institutional Determinants of Investment Inflows into Transition Economies

Victoria Donu, Martin Janíčko
2015 Acta Oeconomica Pragensia  
This article investigates the relationship between institutional quality and the level of investmentinflows into post-communist countries. We attempt to empirically verify the argument thatinstitutional determinants are essential in explaining the variation in investment inflows intotransition economies after the demise of socialism in the early 1990s. The role of institutions isassessed using Economic Freedom indices provided by the Heritage Foundation. Consequently,to investigate the progress
more » ... tigate the progress of institutional quality in transition economies, we further employindicators developed by the European Bank for Reconstruction and Development. Using a paneldata set for 11 transition countries from 1993 to 2013, we conclude that the impact of institutionalquality on investment inflows is not negligible, yet much weaker than suggested by the existingtheoretical literature. Using a fixed-effects model framework in both regression benchmarkswith metrics from the Heritage Foundation and the European Bank for Reconstruction andDevelopment, respectively, we observe that the impact of institutional variables on the level ofinvestment was less significant than expected. Moreover, macroeconomic fundamentals appearto always play a more substantial role than institutional factors.
doi:10.18267/j.aop.483 fatcat:6y5dcfjkg5cmvo5ack4bzvbgdu