Economic Institutions and the Outward FDI Location Strategies of Emerging Market Multinational Business Groups: Evidence from Central and Eastern European Countries

Abstract

Using an extensive data set on the Outward Foreign Direct Investment (OFDI) projects fromCentral and Eastern European Countries (CEEC), this study empirically examines the impactsof host country economic institutions, including property rights protection, corruption,taxation, business operating regulations and economic stability, on firms location decisionsin the European Union (EU), while controlling for other conventional determinants oflocation choice. From a data set of 24,726 location decisions of 951 firms for a time periodfrom 1995 to 2010, the robust empirical evidence suggests that a corruption-free country witha lower tax burden and friendly business regulations positively influence the OFDI locationchoice strategies of CEEC multinationals. However, these factors vary depending on whetherthe host country has an advanced economy (EU15: original member countries of the EU), oran emerging economy (CEEC). The effects of economic institutions are more profound onthe location activities in the advanced economies of the EU than in other CEEC. Furthermore,CEEC investors generally prefer to be located in countries that have better institutions thantheir home countries.