The Global Economy as Instituted Process: The Case of Central and Eastern Europe

Abstract

I argue that economic globalization, indicated by the tremendous rise in world foreign direct investment (FDI) in recent decades, is not driven simply by investor considerations of economic risk and return, but is significantly shaped by the construction of demand for foreign capital by receiving states. States signal this demand through the levels of formal and substantive legitimacy they grant to FDI. They institutionalize globalization in formal rule as a normatively desirable development strategy. States substantiate this commitment by providing domestic and foreign actors with ideational and organizational resources to facilitate FDI. To illustrate this argument, I use the case of Central and Eastern Europe, which was largely closed to global capital before the collapse of Communism. Analyses of quantitative and qualitative data show that substantive legitimacy granted to FDI by host states, more than formal regulations, determined the size of foreign capital flows into postsocialist countries in the first decade of market reform. These findings point to social foundations of macroeconomic trends beyond the instrumental considerations of risk and return privileged in previous research.