Hasan Tutar

Faculty of Economics and Administrative Sciences, Istanbul Beykent University, Istanbul, Turkey

hasantutar@beykent.edu.tr;

Research Methods Application Center, Azerbaijan State University of Economics (UNEC)

ORCID 0000-0001-8383-1464 

Institutional quality and FDI-driven ınnovation in transition economies: Evidence from Central and Eastern Europe

Jaroslaw Korpysa

Bioeconomy Research Institute,

Vytautas Magnus University, Agriculture Academy, Lithuania 

jaroslaw.korpysa@vdu.lt

ORCID 0000-0002-2400-3308

Abstract. This study empirically examines the impact of Foreign Direct Investment (FDI) on technological innovation in Central and Eastern European transition economies and the moderating role of institutional quality in this relationship. Balanced panel data covering 12 countries for the period 2001–2022 were used; the composite innovation index, derived from the geometric mean of patent applications and R&D expenditure, was the dependent variable, and the institutional quality index, calculated from the World Governance Indicators, was the moderator variable. The fixed-effects estimator was selected using the Hausman test; endogeneity was addressed using System GMM. It was observed that the impact of FDI on innovation operates conditionally to the institutional context and through long-term channels; short-term institutional improvement can negatively affect innovation performance in the short term due to transition costs. The findings reveal that investment incentive policies should be designed simultaneously with long-term institutional capacity building rather than capital volume. 

Received: September, 2025

1st Revision: April, 2026

Accepted: June, 2026

DOI: 10.14254/2071-789X.2026/19-2/2

JEL Classification: C23, F21, F23, O43, P27

Keywords: foreign direct investment, technological innovation, institutional quality, transition economies, panel data