Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture Matter and Why?

The aim of this research is to analyse the importance of cultural and institutional determinants in attracting FDI to transition countries. We rely on gravity econometric framework and examine the impact of cultural and institutional factors on FDI using bilateral FDI flows between home (i.e. major trading partners) and eight transition economies in the period 2000–2018. We study this relationship in an integrated framework considering principal gravity forces, traditional FDI determinants, policy and institutional factors. We provide strong and robust evidence that cultural factors, depicted in Hofmann cultural indices, influence MNCs’ locational decisions. Other things held constant, specific cultural features seem more important than formal institutions, which seems at odds with standard neoclassical propositions, and shed some new light on the way we understand international business transactions.