Embedded Economies: Social Relations as Determinants of Foreign Direct Investment in Central and Eastern Europe

Foreign direct investment (FDI) is considered a powerful catalyst in market transition. However, FDI flows vary greatly across Central and East European transition countries. I compare and contrast current approaches, which consider country characteristics as determinants of FDI, with a relational approach that emphasizes institutional, political, economic, and cultural connections between investor and host countries. Regression analyses of FDI flows in country dyads provide little evidence for the effects of country characteristics. Political, migration, trade, and cultural relations between investors and hosts have strong positive effects on FDI flows, and they add considerably to the proportion of the explained cross-national variance. These findings highlight the utility of a relational understanding of macroeconomic processes, as well as the importance of examining how substantively different social relations shape economic exchange.