The aim of this paper is to identify the role of institutions in creating a prosperous business environment for attraction of the Foreign Direct Investments. This research is based on the statement that efficient markets depend on supporting institutions that can provide the formal and informal rules of the game of a market economy, allowing a lower transaction and information costs and reducing uncertainty. Moreover, it has to be stated that the legal and governmental arrangements as well as informal institutions underpinning an economy influence corporate strategies, thus profoundly influence the operation and performance of businesses. The methodology in this paper consists of comparing statistical data for the Balkan countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Serbia, FYROM and Slovenia). The general conclusion drawn in this paper is that Western businesses entering countries with lower degree of institutional development face higher transaction costs such as bribery than in countries with higher degree of institutional development. Hence, the institutions play significant role in the process of one country’s attempt to attract Foreign Direct Investment.