Reassessing the FDI–growth nexus: the role of institutional development in central and Eastern Europe

Abstract Conventional wisdom says that foreign direct investment (FDI) fosters economic growth. This idea shaped economic policies worldwide, particularly in the newly established countries of Central and Eastern Europe (CEE). This paper examines the interaction of institutional performance, FDI inflows, and economic growth in the CEE economies. The study, based on panel data (2000–2023) and a variety of robust econometric methods, brings to light three major insights. First, FDI inflows do not directly cause economic growth in the region. Second, institutional quality has a significant impact on economic growth in CEE. Third, the relationship between the development of FDI and the quality of institutions in the region is statistically insignificant, suggesting the absence of complementarities. These findings challenge the conventional FDI-led growth hypothesis for transition economies and suggest that institutional strengthening should take precedence over FDI attraction in policy agendas. The study concludes that the quality and sectoral composition of FDI, particularly innovation-linked and export-oriented FDI, should complement institutional strengthening for sustainable growth in post-transition economies.