Is There an East-West Structure in the Location of FDI in Europe? The Role of Institutions and Political Risk

Abstract

The accession of new countries from Eastern Europe to the European Union represents one of the most significant challenges currently facing this political institution. With respect to foreign direct investment (FDI), this enlargement should promote and attract investment and lead to greater uniformity in the factors that motivate it. However, when decisions are taken over FDI location, it cannot be affirmed yet that no differences exist in relation to the region to which the country belongs. This paper, by using a Nested Logit Model and a Conditional Logit Model, studies the existence of an East-West structure in the location of FDI, perceived by multinational enterprises (MNEs) from a late investor country in Europe. The results confirm the existence of such a regional distinction and also the role of political risk, the quality of institutions and host country macroeconomic variables; such as GDP growth, unemployment and population.