Institutional Determinants of Foreign Direct Investment.

Foreign direct investment (FDI) is one of the most significant economic mutually beneficial interactions between multinational companies and countries. Receiving foreign capital is one of the most important factors for economic growth and that is why countries try to establish favourable conditions for FDI inflow into their economies. This is the reason why economists and political science researchers try to identify what are the most important determinants of FDI and in doing that most of them employ Dunning’s eclectic paradigm identifying three types of advantages of the host (FDI receiving) countries. Through Dunning’s logic authors find that the economic, political and institutional characteristics of the host country define their FDI location advantage and argue which of those groups of characteristics or a single characteristic have prevalence over the others. Most of the researchers reach the conclusion that the most significant FDI determinants are the market size and the cost of labour along with the type of the trade regime and the macroeconomic stability. Taking into account these factors the paper researches the cases of Bulgaria and Turkey in order to determine whether the quality of the institutions of the host country like the rule of law, the government effectiveness, the quality of the judicial system and the scale of corruption also have significant effect on investors’ decisions. The institutional factors appear to be significant determinants of FDI in the examined cases .It is important that both researchers and policy makers focus on the institutional factors for attraction of FDI as unlike market size and natural resources, for example, institutions can be changed and improved. This is particularly evident in relationship of Bulgaria and Turkey with the European Union (EU). Many of the institutional changes and reforms in the two countries are related to the membership in the EU, which puts pressure for improvement of the regulatory framework of the candidate member countries.