We investigate the factors attracting FDI into highly diversified Russian regions during the phase of transition, and verify the impact of transition experience on the current FDI inflow. Using cross-sectional and panel data, we demonstrate that the highly inhomogeneous investment pattern is explained, in addition to classical demand factors, by specific economic and socio-institutional regional characteristics. Russia appears as an idiosyncratic country where foreign investors seek a stable social and institutional context. Using recent FDI data we show that transition experiences influence current FDI inflow, particularly when the strength of the institutional environment and availability of infrastructures are taken into account.

Abstract:The aim of this work is to provide new evidence on the factors that determine the fl ow of FDI among transition countries. The analysis takes into consideration the period of most intense transition and post-transition (1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002) of 26 former socialist countries. The empirical estimates enable us to draw two main conclusions: fi rst classical locational FDI factors maintain their role in the context of transition countries, and, second, that FDI are infl uenced by specifi c market and institutional factors. Among market variables, relatively higher labour costs surprisingly do not constitute an obstacle for foreign investment. We fi nd that variables refl ecting market stabilising institutions play a more important role than those representing market creating institutions. Although, there is a certain tolerance of foreign investors towards weak institutional environment, we demonstrate that, to attract FDI, countries should reinforce their macroeconomic stability by focusing on market stabilising institutions.