Governance and civil and political rights as FDI determinants in transition countries

Abstract

This paper aimed to investigate the FDI determinants in 27 transition countries within the 2002 – 2018 period by employing system GMM analysis. One of the results of our research is that an uncertain political situation and civil liberties violations have a significant negative impact on foreign investors’ confidence. Generally, the erosion of democratic institutions acts as a deterrent to FDI inflows. Transition countries which experienced prolonged periods of central planning also recorded lower levels of FDI inflows. The results show that creating conditions for stimulating foreign investors through the improvement of institutional quality embodied in the control of corruption and voice and accountability impacted positively on FDI inflows. The interplays between overall institutional quality, voice and accountability, regulatory quality, government effectiveness and GDP growth are positive and significant. Hence, macroeconomic development has an important impact on the marginal effect of institutional quality. Therefore, we concluded that the influence of governance on FDI inflows is conditional on the transition countries’ macroeconomic performance. Our findings also reveal that of the governance dimensions, control of corruption and voice and accountability have a significant influence on the decision of multinationals to undertake investment.