Multinational Enterprises and Emerging Economies
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Multinational Enterprises and Emerging Economies

Klaus E. Meyer

Guided by the overarching question “how and why does the emerging economy context matter for business?”, this collection brings together key contributions of Klaus Meyer on multinational enterprises (MNEs) competing in, and originating from, emerging economies. The book also explores how outward investment strategies contribute to building internationally competitive MNEs.
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Chapter 3: Foreign investment location and institutional development in transition economies

Alan Bevan, Saul Estrin and Klaus Meyer

Abstract

Institutions are widely regarded as a crucial locational advantage of host countries aiming to attract foreign investors. However, there is little agreement on which institutions matter, and why. This study contributes to filling this gap by analyzing the impact of different dimensions of the newly created institutional framework in East European transition economies on foreign direct investment (FDI). Using a dataset detailing FDI flows from individual market economies to transition ones, we examine the relationship between institutional development and FDI inflow. We find that FDI is positively related to the quality of formal institutions, though an impact from informal institutions can only be shown for the special case of Russia, which has suffered from a gap between the extensiveness and effectiveness of legal reform. Several specific formal institutions are found to influence FDI: private ownership of business, banking sector reform, foreign exchange and trade liberalization, and legal development. Conversely, domestic price liberalization, non-bank financial sector development and competition policy do not enhance FDI. These results point to important complementarities, but also potential conflicts, between policy reform and the interest of multinational firms.

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