Economic Liberalization Policies and Foreign Direct Investment in Southeastern Europe

In this paper, we investigate the particular characteristics of ten Southeastern European economies that have helped them attract FDI inflows over the period of 1995-2006. In addition to macroeconomic variables, we make use of ten economic freedom indices for assessing the development of the domestic investment climate. European Union membership brought greater market access, fewer trade barriers and increased foreign investor interests to Greece, Bulgaria, Romania and Slovenia. Also, perspective of future EU membership has increased foreign investor confidence in countries such as Turkey, Albania, Macedonia, and Bosnia and Herzegovina. Using panel data analysis, we find that market size measured by real GDP is a positive and significant determinant of FDI inflows. We show that major positive political developments especially those related to perspective EU membership and legal reforms have significant positive effects in attracting FDI into the region. Fruthermore, lower tax rates and a smaller burden of government debt attracts significantly more FDI. More open economies also attract more foreign investment. Countries with a freer business environment in which there are fewer regulations regarding starting or closing a business enjoy greater FDI. Results regarding the effects of labor market and monetary freedoms and literacy rates on FDI are mixed. These results provide benefits to develop policy recommendations related to long term capital flows into Southeastern European countries. [PUBLICATION ABSTRACT]