Doing business in Ukraine – multinational companies in the trap of regional institutions?

Abstract

The transition process in Ukraine is far from being completed and large differences among the regions prevail. The adaptation of market-based and reliable institutional arrangements differs strongly among the capital region, the western (Lviv), and the eastern part (Kharkiv) of the country. Conducive regional institutions are necessary for two reasons. First, multinational corporations (MNCs) need transparent and reliable institutions to fully exploit benefits from their investment decision. Second, MNCs might only deliver positive impacts to the regional economy which are envisaged by the local governments under these circumstances. This paper aims to assess the quality of regional institutions from the perspective of MNCs and the interdependence between institutional quality and investment motives by using data from an explorative enterprise survey of 153 foreign firms in three Ukrainian regions. The analysis of the World Bank’s Doing Business indicators clearly shows strong regional variation in institutional quality in Ukraine. Due to higher institutional quality, investors are attracted to the capital region and are potentially performing more sophisticated activities and create a higher value for the regional economy. Whereas the capital region can be seen as the frontrunner in the transition process, the regional economic system of Kharkiv is still strongly based on persisting networks from the Soviet time which leads to worse evaluations of the institutional quality. In Lviv, the post-Soviet legacy is less pronounced and institutional quality is assessed more positive than in Kharkiv, but still falls behind the capital region. As a result of the very distinct assessment of the regional quality of institutions, region-specific policy measures are proposed.