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  • Cited by 5
  • Print publication year: 2005
  • Online publication date: September 2009

5 - Foreign direct investment and government policy in Central and Eastern Europe



Relationships between multinational enterprises (MNEs) and governments in Central and Eastern Europe (CEE) have been shaped by the region's struggle to shed legacies of central planning, and create prosperous market economies. This context has created special challenges for both MNEs and local governments to establish relations with each other, understand each other's needs, and to engage in mutually beneficial negotiations.

Due to path dependency of institutions, extraordinary politics during this period and the inheritance from the previous regime shape the future institutional frameworks (North, 1990; Stark, 1992). Policy decisions during the period of radical change around 1990, such as methods of privatization, had long-lasting effects on institutions, and moreover on the distribution of wealth and power. In many countries, the institutional vacuum and weak legal framework in the early 1990s permitted a large extent of opportunistic behavior, rent shifting, bribery, and corruption. In some countries, vested interests have inhibited the pace of reform (EBRD, 1999; Stiglitz, 1999). Consequently, the process of building institutions in transition economies has taken more time than most reform scenarios envisaged in 1990.

The duration of extraordinary politics and the pace of reform depend on each country's economic and institutional legacies. Some countries were considered among the developed economies prior to the Second World War while others went directly from a feudal or early capitalist system to a socialist system. These distinct cultural and systemic inheritances influence informal institutions such as norms and values in these countries.

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