Institutional development and firm profitability in transition economies

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Although transition economies experience significant institutional transformations that vary in their pace and magnitude, our understanding of how such changes influence firm performance is rather limited. We examine how variations in institutional reforms and international openness in 16 transition economies in Central and Eastern Europe (CEE) influence firm profitability. We enhance the understanding of this subject by showing that such institutional changes have different effects on the competitive advantages and in turn profitability of domestic firms and foreign subsidiaries. Our analysis of over 230,000 observations reveals that institutional reforms benefit domestic firms. Conversely, a completely different pattern emerges for foreign subsidiaries, indicating that institutional reforms have negative consequences for their profitability. Hence, in contrast to the established assumption that developed institutional environments are advantageous for foreign subsidiaries, the nature of institutional changes makes domestic firms the main beneficiaries.

Original languageEnglish
Pages (from-to)369-378
Number of pages10
JournalJournal of World Business
Issue number3
Early online date22 Jun 2015
Publication statusPublished - 8 Apr 2016


  • firm performance
  • foreign affiliates
  • institutional development
  • international openness
  • transition CEE economies


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