This paper aims to explain the dominant position of the European Union's (EU) direct investment flows in the Central and Eastern European (CEE) transition economies through an empirical investigation of their main determinants. The growth rates and the degree of indebtedness of the host countries, the strong bilateral trade relations and the geographical proximity between most of the countries of the two regions appear to be by far the most important determinants of such flows. Other factors, such as the cost of capital and labour costs together with the relative market size of the host countries, as well as the growth rates of the investing countries, also exert significant influence on the volume of EU investment in the region. In addition, the analysis shows that, as the transition process for most of the CEE economies comes to an end, foreign investment inflows towards these countries relate more to the general case that normally applies to developing countries (according to which economic performance and prospect, together with the comparative position of a country primarily matters), rather than to the progress of the privatization programs.