Munich Personal RePEc Archive

The effects of FDI on recipient countries in Central and Eastern Europe

Bačić, Katarina and Račić, Domagoj and Ahec Šonje, Amina (2004): The effects of FDI on recipient countries in Central and Eastern Europe. Published in: Privredna kretanja i ekonomska politika , Vol. 14, No. 100 (October 2004): pp. 58-96.


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Literature on economic growth and FDI implies that FDI can facilitate growth of recipient economy via capital formation channel directly and via positive spillovers and inclusion into international productive and innovative networks indirectly. In this paper, the role of FDI in explaining growth is examined in two quantitative steps. In the first step, a bi-variate Granger causality test is used to examine whether FDI Granger causes growth, merchandise exports and imports. In the second step, growth equation with FDI as one of the explanatory variables is estimated based on panel data set for 11 transition economies in the period 1994-2002. The final results of the analysis imply that FDI is not statistically significant in explaining variation in the growth rates of the observed economies. The finding can be explained by the fact that FDI have not contributed to the capital formation strongly because they have dominantly flown into the observed economies as “brownfield” investments, moreover, they have been directed into service sector.

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