Does Institutional Quality Matter for the IDP Hypothesis? Evidence from Emerging Europe

The study empirically explores the relationship between OFDI and the home
country’s institutional quality by employing a panel of 23 European emerging
countries between 2000 and 2019. In doing so, the study employs the VECM
estimation procedure. The key findings of this research indicate that the rate of
adjustment to reach long-run equilibrium in European post-transition countries is
lower than in European transition countries. In conclusion, there is evidence, for
the period being investigated, of causality between the home country’s institutional
quality and OFDI in both regions. Also, most of the transition countries are still
in the process of building the institutional environment, with many institutional
voids and different starting points of their internalization process. In fact, most
of the countries, especially European transition countries, are in stage 2 or stage 3
of their investment development path (IDP) development, where IFDI stock still
remains higher than OFDI stock.