FDI and economic growth in Central and Eastern Europe: Is there a link?

Bačić, Katarina and Račić, Domagoj and Ahec Šonje, Amina (2004): FDI and economic growth in Central and Eastern Europe: Is there a link?

Abstract

Economic literature on economic growth and FDI (foreign direct investment) implies that FDI can facilitate growth of recipient economy via capital inflow instantly and via positive spillovers and inclusion into international productive and innovative networks ex post. In this paper the role of FDI is examined by using bi-variate Granger causality test for growth, merchandise exports and imports, and by modeling growth equation with FDI as one of the explanatory variables in pool regression for 11 transition economies in CEE. The final results of the quantitative analysis imply that FDI cannot account for higher growth of the observed economies. FDI appears insignificant for growth. The finding can be explained by the fact that FDI have not contributed to the capital formation strongly because they have dominantly flown in as brownfield investments into services. Market-orientation of FDI coupled with the use of home country suppliers’ or parent company’s goods and services might have helped to annul the positive effects of FDI.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign direct investment, economic growth, Central and Eastern Europe, spillover, competitive effect, enterprise restructuring, industrial networks, absorptive capacity
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business

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