The FDI Location Decision: does Liberalisation Matter?

In this article, we address the question of whether market, trade and financial liberalization has an impact upon FDI location decisions. We use a sample of Italian firms which have made investments in seven Central and East European countries (i.e. Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia). The results confirm that market size and growth, the availability of labour, the quality of infrastructure, and agglomeration economies are all important determinants of FDI location. However, we also show that the choice of FDI location is positively influenced by the extent of trade, financial and (weakly) market liberalization, and negatively related to the openness to foreign banks. This study improves upon the previous studies in a number of aspects: it uses firm-level data from the very start of transition process in 1990; it includes various dimensions of liberalization, notably financial liberalization and openness to foreign banks, which have not previously been considered; and finally, it provides elasticity estimates that show the changes in the probability of FDI location in each country arising from further liberalization in each of the other countries in the region.