Do Institutions Still Matter for Investors? Impact of Institutional Determinants on Investment Infl ows into European Economies

Victoria Donu () and Martin Janíčko ()
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Victoria Donu: Faculty of Social Sciences, Institute of Economic Studies, Charles University in Prague, Czech Republic
Martin Janíčko: Faculty of Economics, University of Economics in Prague, Czech Republic

Acta Oeconomica, 2018, vol. 68, issue 2, 245-270

Abstract: Institutional quality is commonly cited as a reason that investment infl ows still vary across European countries, despite their economic stabilization following the tumultuous years in the early 1990s. This article tests empirically whether institutional quality has any bearing on the level of investment infl ows into selected groups of European countries. The role of institutions is assessed using Economic Freedom indices from the Heritage Foundation. We construct a panel dataset from 2000–2015 for 35 European countries to apply a fixed-effects and generalized method of moments model framework in the regression benchmark with the metrics from the Heritage Foundation. Results show that although institutional quality has some impact on the level of investment, it is less significant than expected and far less than suggested by the existing theoretical literature. Macroeconomic fundamentals matter more than do institutional factors.

Keywords: foreign direct investment; institutional determinants; fundamentals; European economies; panel data (search for similar items in EconPapers)
JEL-codes: F21 F23 H11 K20 (search for similar items in EconPapers)
Date: 2018
Note: Some parts of the article were already published in Acta Oeconomica Pragensia (2015). In comparison with the previous version, the current article contains number of changes, updates and extensions. The authors would like to thank the anonymous reviewers for their valuable comments and suggestions that greatly contributed to improving the article.
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