The effects of transition and political instability on foreign direct investment: Central Europe and the Balkans

In this paper we estimate the effects of transition and political instability in the Eastern European and Balkan transition countries on their FDI inflows. For transition countries unaffected by political instability, FDI inflows in the 1990s were around 20 to 30% of those achieved by European market economies with similar economic characteristics. Progress with transition and reform increased transition economies’ ability to achieve their potential FDI inflows, but because of their progress in stabilization and macroeconomic performance, this transition gap was not closed very much in the 1990s. The Balkan countries also suffered additional shorfalls in FDI due to political instability. Our estimates show that these shortfalls were large.