The Location of Foreign Direct Investment in the Central and Eastern European Countries: A Mixed Logit and Multilevel Data Approach

This paper uses the Mixed logit (ML) model and a novel three-level dataset to examine the factors explaining 1,108 foreign direct investment (FDI) location decisions into 13 Central and Eastern European countries (CEECs) over an eleven-year period between 1997 and 2007. The ML model approach is superior to other discrete choice methods in that it allows for random taste variation, unrestricted substitution patterns and correlation in unobserved factors over time. The highly significant empirical results, based on a general underlying economic model of imperfect competition, show that the responsiveness of the probabilities of choices to invest in a particular country in CEE to country-level variables differs both across sectors and across firms of different sizes and profitability. The results generalise previous studies that used only country-level data or only industry- and firm-level data to give a more accurate explanation of the firm-specific investment location decisions.