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FDI and Economic Growth – Perspective of Southeast European Countries

Author

Listed:
  • Derado Dražen

    (University of Split, Faculty of Economics, Business and Tourism, Split, Croatia.)

  • Horvatin Darko

    (Effectus University College, Zagreb, Croatia.)

Abstract

Emergence of new economic entities, through either integration or disintegration, always creates system inefficiencies resulting in temporary economic setbacks. At the macroeconomic level, this brings about slowdown in economic growth and delayed catching up with more advanced economies. In Europe, the turn of the century brought along political and economic disintegration, on one hand, and economic integration, on the other. Demise of planned economies across Eastern Europe caused serious economic turmoil due to market fragmentation. Meanwhile, creation of new economic architecture in the European Union (EU) has created additional challenges of economic restructuring. Therefore, achieving sustainable economic growth and high income has become the ultimate economic policy objective. Equity investment in form of foreign direct investment (FDI) has proven to be the right choice, because influx of fresh capital and know-how enabled strong economic growth and restructuring through increasing labor productivity and economic efficiency. Stronger competitive pressure through FDI contributed to dynamic restructuring, resembling in increasing exports and stronger integration into global economy. Yet, growth rates across countries were not always proportional to the volume of inward FDI, which indicates a certain level of underperformance for some countries. The aim of the paper is to closer investigate the FDI-growth nexus by differentiating between two types of FDI – mergers and acquisition (M&A) and greenfield investment. Thus, the analysis will take account of the characteristics of the FDI host economy, and those of the investing company, because we find it reasonable to assume that different forms of FDI incorporate different business dynamics and the time horizon of the investor’s expectations. In order to find out the effects of different forms of FDI on economic growth we apply panel data analysis with fixed effects and Prais-Winsten estimator on the sample of European reform countries whereby FDI, M&A and greenfield investment are considered the key variables. Analysis also includes a set of control variables, which combine standard neoclassical growth variables. Results indicate that, with reference to the level of innovativeness, different types of FDI indeed produce different effects on host countries’ economic growth.

Suggested Citation

  • Derado Dražen & Horvatin Darko, 2023. "FDI and Economic Growth – Perspective of Southeast European Countries," Zagreb International Review of Economics and Business, Sciendo, vol. 26(1), pages 119-148.
    • Handle: RePEc:vrs:zirebs:v:26:y:2023:i:1:p:119-148:n:1006
    DOI: 10.2478/zireb-2023-0006
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    References listed on IDEAS

    as
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    5. Aneta Krstevska & Magdalena Petrovska, 2012. "The economic impacts of the foreign direct investments: panel estimation by sectors on the case of Macedonian economy," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 1(2), pages 55-73.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    FDI; M&A; greenfield investment; SEEC; EU;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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