Does Institutional Quality Matter for the IDP Hypothesis? Evidence from Emerging Europe

Abstract

The study empirically explores the relationship between OFDI and the home country’s institutional quality by employing a panel of 23 European emerging countries between 2000 and 2019. In doing so, the study employs the VECM estimation procedure. The key findings of this research indicate that the rate of adjustment to reach long-run equilibrium in European post-transition countries is lower than in European transition countries. In conclusion, there is evidence, for the period being investigated, of causality between the home country’s institutional quality and OFDI in both regions. Also, most of the transition countries are still in the process of building the institutional environment, with many institutional voids and different starting points of their internalization process. In fact, most of the countries, especially European transition countries, are in stage 2 or stage 3 of their investment development path (IDP) development, where IFDI stock still remains higher than OFDI stock.