FOREIGN DIRECT INVESTMENT LOCATION AND INSTITUTIONAL DEVELOPMENT IN IN THE MANUFACTURING SECTOR IN SOUTH EAST EUROPEAN COUNTRIES

This paper investigates the importance of factor endowment vis-a-vis institutions development in explaining the locational choice of foreign investors in manufacturing sector in SEE countries. Using panel dataset for the period 1999 to 2006 we constructed an econometric model that was used to estimate the determinants of FDI on sectoral level. The determinants were grouped into control variables and institutionally related variables. The selection of control variables was motivated by existing research on FDI, and our results are consistent with the empirical evidence on the key determinants of FDI reported in the literature. Our analysis indicates that the overall quality of the institutions attracts FDI in manufacturing sector in SEE region. Besides, we identified individual determinants by disaggregating to subsets of institutional development. In this context, the results indicate that a few institutional changes enhanced FDI receipts to manufacturing sector: development of privatisation process, liberalization of foreign exchange and trade, development of competition policy and development of infrastructure reform. On the other hand, enterprise restructuring, domestic price liberalization and development of the banking sector do not seem to be a significant motive for FDI in our study, probably because the described institutional changes do not present a significant obstacle to foreign investors.