Introduction

This chapter addresses the role of institutions and institutional reform as a country-specific competitive advantage affecting the location of inbound foreign direct investment (FDI). Our focus of interest will be on European transition economies. Our thesis (backed up by a limited amount of econometric and field research) is that the extent and quality of a nation's institutions and its institutional infrastructure (II) are becoming a more important component of both (a) its overall productivity, and (b) its drawing power to attract inbound FDI. This, in turn, reflects the belief by private corporations (both foreign and home based) that the role played by location bound institutions and organizations in twenty-first-century society is becoming an increasingly critical determinant of the successful deployment of their own ownership specific, but often mobile, assets.

The chapter proceeds in the following way. First, we shall offer a simple analytical framework which might help us to explore the thesis set out above. Second, we shall identify the more significant firm-specific strategies and those affecting host transition economies, brought about by changes in the world economic and political scenario over the past decade or so; and how these are affecting the locational pull and push of multinational enterprise (MNE) activity. In particular, we shall examine the evidence of the links between the upgrading of the II of the Central and Eastern European region and its propensity to attract inbound FDI (vis-à-vis other areas in the world).