Working Paper Series no. 488: Foreign direct investment drivers and growth in Central and Eastern Europe in the aftermath of the 2007 global financial crisis

Abstract

In the context of the recent deceleration of growth in emerging Europe, we reassess empirically the effect of foreign direct investment (FDI) inflows on economic growth in Central and Eastern European countries (CEECs) through an analysis carried out over the period 1993-2013. In a first step, we show that the main domestic determinants of FDI inflows are the market size, risk premia, unit labour costs, the openness, as well as progress in structural reforms (mainly related to privatisation process and banking sector) and institutional reforms (namely the lack of trade barriers, the ability for individuals to accumulate private property and progress in fighting corruption) in the host economy. Moreover, the macroeconomic conditions in the euro area also play an important role in explaining FDI flows to the region. In a second step, we analyse the impact of FDI inflows on economic growth. Our findings add to the strand of literature pointing out a positive effect of FDI inflows on growth. We consider the occurrence of the 2007 and 2011 crises and show their negative impact on the FDI - economic growth link, both crises reducing the positive impact of FDI on economic growth.

Ramona Jimborean and Anna Kelber
June 2014

Classification JEL : F21; O52; P33

Keywords : foreign direct investment; Central and Eastern Europe