The Impact of the Ease Doing Business Indicators on Foreign Direct Investment in the European Transition Economies

Abstract The objective (aim) of this paper is to explore the impact of the Ease of Doing Business Indicators on FDI on transition economies in Europe. Authors have used the dynamic panel methodology, by using three methods: Pooled Ordinary Least Square (POLS), Fixed Effect (FE), and Two Step-System Generalised Method of Moments (GMM) estimation techniques. By referring to the GMM technique, it can be seen that variables such as: Starting a Business, Registering property, Getting electricity and Resolving insolvency have a positive and significant impact in attracting FDI in 16 European transition countries, while variables as: Dealing with construction permits, Getting credit, Paying taxes, Protecting minority investors, have shown negative impact, whereas Trading Across Border and Enforcing contracts have not shown any impact on attracting FDIs in European transition countries. This paper contributes to the enrichment of existing literature in this field by using these three methods.


Introduction
Nowadays there is a continuing debate among various authors regarding the impact of the indicators of Doing Business in attracting Foreign Direct Investment (FDI) flows. Based on search results, there are different indicators towards FDI withdrawal. Since transition countries have fewer financial resources to develop their own countries, they need greater attention in attracting FDI flows in their countries. This would enable these states to revitalize their economies, enabling the raising of the standard of living of their citizens.

Literature Review
Different authors have studied the indicators of Doing Business for different countries in attracting Foreign Direct Investment (FDI), which are listed below: Hossain et al. (2018) used panel data to investigate the impact of Ease of Doing Business on Inward FDI over the period from 2011 to 2015 across the globe. (177 countries), respectively they have treated 5 indicators (areas) of Doing Business, such as, starting a business, getting credit, registering property, paying taxes and enforcing contracts. They emphasize that Enforcing Contracts was found to have a positive significant impact on Inward FDI, while Getting Credit and Registering Property were found to have a negative significant impact on Inward FDI, whereas starting a Business and Paying Taxes have no significant impact on Inward FDI. Olival (2012) from his study, using panel data for the period 2004-2009, through a fixed effects estimator, has tried to find a link between nine indicators of Doing Business and Foreign Direct Investment (FDI) inward for 144 developing countries and 33 developed countries. The major implication is that in general, a better-rated business environment is more likely to attract greater amounts of FDI, especially in the case of developing countries. Further institutional areas that are most likely to influence inward FDI are: starting a business, registering a property, and trading across borders. Shahadan et al. (2014) in their study investigated how FDI is influenced by Doing Business Indexes (DBI) for six Asian countries, namely Afghanistan, Bangladesh, India, Iran, Pakistan and Sri Lanka. Panel data were employed for the period 2004-2013, investigating nine indices of Doing Business using pooled OLS, fixed effect, and random effect models estimations. The authors pointed out that there is a strong negative correlation between starting a business and dealing with construction permits indexes. It is a quite small and negative correlation with closing business or resolving insolvency index, but surprisingly, FDI inflows are highly negatively correlated with the paying taxes index. Kasongo (2013) found out a relationship between changes in inward foreign direct investment and the Doing Business Indicators by investigating variables, such as time to start a business, cost to start a business, time to register property, and cost to register a property, time to import, and time to export, and he noticed that some indicators from Doing Business results suggest an insignificant (albeit negative) association between the cost to start a business, time to register a property, time to import, time to export, and FDI, and in his study he points out that starting a business and the cost of registering a property were found to be significant in determining FDI inflows. Mahuni & Bonga, (2017) analysed the impact of Ease of Doing Business Indicators on FDI inflows in Zimbabwe employing a Time Series Analyses for period from 2009-2016 using the OLS regression model. They pointed out that Paying Taxes (PT), Enforcing Contracts (EC), and Getting Electricity (GE) had negative significant impact on FDI inflows. Their study suggests that there is a greater need to improve efficiency in the enforcement of contracts, fair distribution of electricity and energy, improving taxes procedures and compliance enforcement, and correctly dealing with construction permits.
A study by Anderson & Gonzalez (2013) opines that higher Distance To Frontier (DTF) scores are associated with high FDI inflows. Azam et al. (2010) analysed the role of institutional factors and macroeconomic policy factors on FDI inflows, a study which implies that a good institutional quality plays a key role in attractiveness of FDI inflows. A poor macroeconomic policy situation produces negative impact on FDI. Good Institutional quality and poor macroeconomic policy generate negative effect in a combined form on FDI. This study further implies that poor macroeconomic policy deteriorates institutional quality and creates a negative effect on FDI inflows. Piwonski (2010) emphasizes that, by increasing their country's Doing Business rank one level, a government can bring in over $44 million USD.
A legal system that is effective, impartial, as well as transparent and protects property rights is virtually a prerequisite for FDI consideration (Globerman & Shapiro, 2003, Sethi et al., 2002. Sedmihradsky & Klazar, (2002) found out that the most governments of the Central and East European countries adopted tax measures in the 1990s to support foreign direct investments. According to their study, the incentives are effective in attracting new FDI to the countries. Göndör & Nistor (2012) pointed out that the fiscal policy is a major factor influencing Foreign Direct Investment.
According to "Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises", World Bank Group, Washington DC it can be seen that, even though Doing Business indicators focus on small to medium-size domestic firms, many policymakers have associated improvements in the indicators with greater inflows of Foreign Direct Investment (FDI). Cross-country correlations show that FDI inflows are indeed higher for economies performing better on Doing Business indicators, even when taking into account differences across economies in other factors considered important for FDI. Results suggest that on average across economies, a difference of 1 percentage point in regulatory quality, as measured by Doing Business distance to frontier scores, is associated with a difference in annual FDI inflows of $250-500 million. Although this correlation does not imply causation, the evidence suggests that Doing Business reflects more about the overall investment climate than what matters only to small and medium size domestic firms. In particular, these findings support the claim that economies that provide a good regulatory environment for domestic firms tend to also provide a good one for foreign firms. 1

Methodology research and data
Authors used three methods: Pooled Ordinary Least Square (POLS), Fixed Effect (FE), and Two Step-System Generalised Method of Moments (GMM) estimation techniques.
The aim of this paper is to explore the impact of the Ease of Doing Business Indicators on FDI in transition economies in Europe. The authors selected countries in transition in Europe in order to explore the Ease of Doing Business Indicators on FDI to those countries. The countries selected (the aim was to analyse only transition economies in Europe) in this research are: Poland, Czech Republic, Lithuania, Bulgaria, Croatia, Romania, Slovenia, Estonia, Latvia, and the Slovak Republic, and 6 Western Balkans states: Kosovo, Albania, Bosnia and Herzegovina, North Macedonia, Montenegro, and Serbia. Our study covers the time period of 2009-2016.  Table 2 can be seen above, which shows the descriptive statistics of the dataset used in the analyses. Respectively presented: the number of Observations (Obs), Average (Mean), Standard Deviation (Std. Dev), Minimum (Min) and Maximum (Max). From the results it can be seen the average of dependent variable is 4.43, minimum it is -3.20, while maximum value is 37.249 with standard deviation 4.55.
The data are present in percentage; only variables Population and GDP are transformed in logarithm, and for this reason data in the descriptive statistics are close. Step-System Generalised Method of Moments (GMM) estimation techniques. The GMM estimation results are preferred, as it is the more advance techniques, which is proposed by Arellano & Bover (1995) and used also by Blundell & Bond (1998), which corrects endogeneity by introducing instruments to improve efficiency and to transforms the instruments to make them uncorrelated (exogenous) with the fixed effects.  A more detailed explanation of the impact of independent variables (10 indicators from Doing Business) on the dependent variable (FDI net inflows as percentage of GDP) can be seen below: • Starting a Business has a positive impact in attracting FDI flows in European transition countries over years 2009-2016. Similar results are found by Olival (2012). Based on these results, it can be concluded that: "By increasing the indicator of Starting a Business by 1 percent, will cause an increase on FDI-s for 2.10%." This variable is statistically significant at a 95% level of significance. Regarding the Starting a business indicator, North Macedonia, comparing to all the countries involved in the study leads from the reforms taken recently, where only one procedure is required to register a business, which can be carried out within a day, with only 0.1 costs as a percentage per capita income and without having minimum capital as a percentage of per capita income. While the country that has made less reform in this area is Bosnia and Herzegovina, where the number of procedures for registering a business in this country is 12, for a period of 67 days, at a cost as a percentage of income per capita of 14.8% and 28% minimum capital, as a percentage per capita. Regarding the cost of per capita income, Slovenia is at the most favourable level, with 0%, while Bosnia and Herzegovina reaches the highest level with 14.8%. Kosovo is making progress in improving this area, and it is recommended to follow the model of North Macedonia. • Getting electricity has a positive impact in attracting FDI flows in European transition countries over years 2009-2016. Based on these results, it can be concluded that: "By increasing Getting electricity by 1 percent, level of FDI-s will be increased for 3.16%." This variable is statistically significant at a 99% level of significance. Less procedures to access on getting electricity are in the following countries: Lithuania, Poland, and Serbia, while most procedures are required in the following countries: Bosnia and Herzegovina and Romania. Investors need less time to have access in electricity in Slovenia, whereas the longest time in providing this service is Romania. Lower electricity costs, as a percentage per capita income, is in Poland, with only 19.5%, while the country with the most expensive energy among these countries is the Republic of Kosovo, with 788.5% of income per capita. The reliability of supply and transparency of the highest tariff indicator is in Slovakia, with the highest 8 points, while the lowest is presented in Albania with 0 points, as well as in Montenegro. • Registering property has a positive impact in attracting FDI flows in European transition countries over the years 2009-2016. Similar results are found by Olival (2012) in opposition to Hossain et al. (2018). Based on these results, it can be concluded that: "By increasing Registering property by 1 percent, it will cause an increase in the level of FDI-s for 2.02%." This variable is statistically significant at a 95% level of significance. Regarding the number of procedures for registering a property, the lowest ones are presented in Estonia, Lithuania, and Slovakia, with 3 procedures, while most procedures are presented in Bulgaria and Romania, with 8 procedures. The shortest time to register a property is presented in Lithuania, with only 2.5 days, while the longest is presented in Montenegro, with 69 days. The lowest cost to register a property is presented in Slovenia, with 0% expense, while the highest is presented in Albania, with 10.2% of the property value. The highest quality of the property management index is presented in Lithuania, with 28.5%, while the lowest in the state of Bosnia and Herzegovina, with 12.5%. • Resolving insolvency has a positive impact in attracting FDI flows in European transition countries over years 2009-2016. Similar results are found by Olival (2012). Based on these results, it can be concluded that: "By increasing Resolving insolvency by 1 percent, it will cause an increase level of FDI-s for 2.62%." This variable is statistically significant at a 95% level of significance. This indicator implies the commencement of bankruptcy proceedings, asset management of the debtor (company), reorganization procedures and creditors' participation in bankruptcy proceedings. It is therefore important to establish a good legal framework for bankruptcy resolution in order to reduce the time of bankruptcy and at the same time at a lower cost of the debtor's assets, so that the company can be reclaimed or sold as a continuous business. The lowest number of bankruptcy settlement procedures has appeared in Slovenia, with 0.8 procedures, while the highest one is presented in Slovakia, with 4 procedures. The lowest cost as a percentage of wealth for settlement of bankruptcy is in the state of Slovenia, with 4%, while the highest one is displayed in the state of Serbia by 20%. The lowest rate of recovery (cents in dollars) of bankrupt businesses is presented in Serbia, with 30.3%, while the highest is in Slovenia, with 88%. Lower strength index bankruptcy framework is in Kosovo, with 0 points, while the highest is in Bosnia and Herzegovina, with 15 points. • Protecting minority investors has a negative impact in attracting FDI flows in European transition countries over years 2009-2016. Similar results are found by Olival (2012) and Shahadan et al. (2014). Based on these results, it can be concluded that: "By increasing Protecting minority investors by 1 percent, it will cause a decrease in FDI level for 2.03%." This variable is statistically significant at a 95% level of significance. The protection of minority investors, despite trying to give its contribu-tion to investor protection, cannot achieve the right effect, because the judicial and prosecutorial system should pursue cases of misuse (conflict of interest, corruption, or other forms of misuse), therefore taking into account the countries involved in the study, which are in the transition phase, some of them have just started this transition phase and have failed to establish strong, professional institutions and perform their work in an independent way, causing many cases of misuse never to be discovered or judged, thus affecting the frustration of foreign investors to invest in these countries and at the same time seeking to place their investments in countries where they have regulated the legal aspects better, in order to feel confident and comfortable in their investment, thus reducing the level of FDI in these countries.  Shahadan et al. (2014) and Olival (2012). Based on these results, it can be concluded that: "By increasing Getting credit by 1 percent, it will cause a decrease in FDI level for 2.16%." This variable is statistically significant at a 99% level of significance. Getting credit, which measures more the legal aspect of borrowers and lenders, as well as procedural aspects, does not focus on interest rates and loan terms that banks apply when they give loans to potential clients (potential investors), which is very important for investors. Therefore, despite lowering the interest rate on loans in some of the countries surveyed, they has not been able to reach the level required by investors, as well as the conditions for granting loans (the time of the loan payment, procedures, leaving the collateral, delays, etc.), so this may have an impact on the reduction of the level of FDI, and respectively on the transfer of investments of foreign investors to countries with lower interest rates and more favourable conditions for granting loans. • Dealing with construction permits has a negative impact in attracting FDI flows in European transition countries over years 2009-2016. Similar results are found by Olival (2012), Shahadan et al. (2014). Based on these results, it can be concluded that: "By increasing Dealing with construction permits by 1 percent, it will cause a decrease in FDI level for 1.97%." This variable is statistically significant at a 99% level of significance. Based on this indicator, it is noted that some of the countries in this research have made some concessions in issuing construction permits to investors, but some of these countries have not associated this with the complete accompanying infrastructure (electricity, water supply, central heating, sewage, roads, etc.), which are indispensable for investors in starting the investment activity, which has affected the disappointment of investors and the possibility of investing in a more favourable country, affecting the reduction of FDI in these countries. • Paying taxes has a negative impact in attracting FDI flows in European transition countries over years 2009-2016. Contrary to the results found by Shahadan et al. (2014) and Olival (2012). Based on these results, it can be concluded that: "By increasing Paying taxes by 1 percent, it will cause a decrease in FDI level for 4.47%." This variable is statistically significant at a 99% level of significance. Paying taxes, addressing more procedural aspect of the number of payments made, time spent, and introducing only the tax on profit tax treatment, this indicator cannot measure the full effect of the tax payment on the Foreign Direct Investment, because income tax is not included. Therefore, it can be said that the effect of this indicator on FDI may be partial. Also, Inflation, used as an instrumental variable, has had a significant negative impact on the attracting of Foreign Direct Investment in the European economies in transition and Kosovo during 2009-2016. All the while the instrumental variables 'Population' and 'Real GDP Growth Rate' did not show any impact on attracting Foreign Direct Investment in these countries during this period of time.

Conclusion
Based These results were obtained through the usage of dynamic panel methodology, using three methods: Pooled Ordinary Least Square (POLS), Fixed Effect (FE), and Two Step-System Generalised Method of Moments (GMM) estimation techniques, but because the GMM method is more advanced and proper, only the results of this specific method are commented on this paper.
Based on our study, results of countries that have made more evident reforms in improving the business environment are: North Macedonia (increased by 16.65%), whether in reducing/eliminating the procedures, expenses, time and other facilities offered to investors from the first investment stage up to the investor's ongoing operation. While other countries like Serbia 15.39%, Poland 14.3%, Czech Republic 13.08, and Kosovo 11.94% (which is doing reforms to improve the business environment continuously, but it needs a faster pace in this direction), and Croatia had an increase (improvement of these indicators) of 10.54% during this time of period.
Institutions of these states which are taking over the FDI field can learn from each other by improving their business environments by following the models as stated below: • To follow the model of North Macedonia by improving the indicator of "Starting a business" (Time and cost, business registration within one day, with simple procedures in place and only 0.1% of expenses as a percentage per capita income). As a comparison, investors starting a business in Kosovo must respect stricter rules, such as: 5 procedures, 11 days, 1.1% of expenses as a percentage per capita income. Thus, it is important to reduce or eliminate the minimum capital requirement and to create a single interface or a one stop-shop, where some of the countries have already it, to enable online access to the execution of all procedures, to have in place information and easy access to forms. • Follow the example of Poland in the provision of electricity, which provides this resource to investors adequately and with the lowest price comparing with all other countries involved in our study, at a cost of only 19.5% as a percentage per capita income. • Follow the good practices of Lithuania in regulating the aspect of property registration for businesses (3 procedures, 2.5 days, 0.8% of the cost of property and 28.5 points out of 30 points on Quality of Property Management). Thus, countries involved in our study have to reduce the procedures for registering property, which would also reduce the time of property registration. Moreover, reducing the cost of property registration, in relation to the value of the property, would be recommended in these countries. • Establish a strong legal framework for bankruptcy resolution in order to reduce the time of bankruptcy resolution and at the same time to reduce the costs of a debtor's assets percentage so that the company can recover or be sold as a continuing business. The best example to follow in this case is Slovenia (number of procedures 0.8, cost as a percentage of property 4%, recovery rate 'cents in dollars' 88.2, index of bankruptcy index 11.5 out of 15). It is important to establish special insolvency departments, specialized in these areas, which can establish more efficient processes, to offer greater transparency and to guarantee the rights of creditors.