Foreign Direct Investment in Central and Eastern European Countries : The Role of Institutional Reforms

Despite increasing flows of foreign direct investment (FDI), an important gap still exists between FDI toward Central and Eastern European countries (CEECs) and their actual needs to support structural adjustment. Using a Cournot duopoly model with a profit-maximizing foreign-based multinational (MNE) and a local labour-managed firm, I show that insufficient advancement in ‘marketization’ and regulatory framework inadequacy are major elements deterring FDI. I conclude that the creation of market-oriented infrastructures would be welcome, and that the European Union should have a role in inducing CEEC governments to commit to reforms in exchange of firmer prospects of membership.