Foreign Direct Investment Inflow Dynamics: The Case of Central and Eastern Europe

Kunofiwa Tsaurai

doi:10.18778/1508-2008.26.03

Authors

Kunofiwa Tsaurai Ph.D., Full Professor at the University of South Africa, Department of Finance, Risk Management and Banking, Pretoria, South Africa https://orcid.org/0000-0001-8041-1181

DOI:

https://doi.org/10.18778/1508-2008.26.03

Keywords:

foreign direct investment, Central and Eastern Europe, panel data

Abstract

This study investigates the dynamics of foreign direct investment (FDI) inflows into Central and Eastern European countries (CEECs) using panel data (1994–2020) analysis methods such as fixed effects, fully modified ordinary least squares (FMOLS) and random effects. Specifically, the study examined what factors could account for the mixed pattern of FDI inflows into CEECs. The mixed results from the existing empirical literature on FDI inflow dynamics triggered the undertaking of this study to contribute to the ongoing debate on the subject. The study notes that infrastructural development, economic growth and domestic investment had a significant positive influence on FDI across all three panel data analysis methods. Other variables that were found to have had a significant positive effect on FDI include (1) complementarity between infrastructural and financial development (fixed effects, random effects), (2) trade openness (fixed effects) and (3) savings (random effects, FMOLS). A significant negative impact of the exchange rate on FDI was observed under the FMOLS. CEECs are therefore urged to implement policies to increase infrastructural development, financial development, trade openness and savings to enhance the inflow of FDI. Future studies should investigate the minimum threshold levels of the explanatory variables of FDI.

Downloads

Download data is not yet available.

References

Abel, S., Mukarati, J., Mutonhori, C., Roux, P. (2021), Determinants of foreign direct investment in the Zimbabwean Mining Sector, “Journal of Economic and Financial Sciences”, 14 (1), a595, https://doi.org/10.4102/jef.v14i1.595
Google Scholar DOI: https://doi.org/10.4102/jef.v14i1.595

Abiola, A. (2019), Determinants of foreign direct investment in Nigeria: A structural VAR approach, “International Journal of Applied Economics”, 16 (1), pp. 22–37.
Google Scholar

Agiomirgianakis, G.M., Asteriou, D., Papathoma, K. (2004), The Determinants of Foreign Direct Investment, [in:] C. Tsoukis, G.M. Agiomirgianakis, T. Biswas (eds.), Aspects of Globalisation: Macroeconomic and Capital Market Linkages in the Integrated World Economy, Springer Science+Business Media, New York, pp. 83–101, https://doi.org/10.1007/978-1-4419-8881-2_6
Google Scholar DOI: https://doi.org/10.1007/978-1-4419-8881-2_6

Aliber, R.Z. (1970), A theory of direct foreign investment, [in:] C.P. Kindleberger (ed.), The international corporation: a symposium, MIT Press, Cambridge, pp. 17–34.
Google Scholar

Ashurov, S., Othman, A.H.A.O., Rosman, R.B., Haron, R.B. (2020), The determinants of foreign direct investment in Central Asian region: A case study of Tajikistan, Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan (A quantitative analysis using GMM), “Russian Journal of Economics”, 6 (2), pp. 162–176, https://doi.org/10.32609/j.ruje.6.48556
Google Scholar DOI: https://doi.org/10.32609/j.ruje.6.48556

Asiedu, E. (2002), On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?, “World Development”, 30 (1), pp. 107–119, https://doi.org/10.1016/S0305-750X(01)00100-0
Google Scholar DOI: https://doi.org/10.1016/S0305-750X(01)00100-0

Asong, S., Akpan, U.S., Isiye, S.R. (2018), Determinants of foreign direct investment in fast‑growing economies: Evidence from the BRICS and MINT countries, “Financial Innovation”, 4 (26), pp. 1–12, https://doi.org/10.1186/s40854-018-0114-0
Google Scholar DOI: https://doi.org/10.1186/s40854-018-0114-0

Aye, G.C., Edoja, P.E. (2017), Effect of economic growth on CO2 emission in developing countries: Evidence from a dynamic panel threshold regression model, “General and Applied Economics”, https://doi.org/10.1080/23322039.2017.1379239
Google Scholar DOI: https://doi.org/10.1080/23322039.2017.1379239

Azam, M., Haseeb, M. (2021), Determinants of foreign direct investment in BRICS‑does renewable and non‑renewable energy matter?, “Energy Strategy Reviews”, 35, pp. 1–10, https://doi.org/10.1016/j.esr.2021.100638
Google Scholar DOI: https://doi.org/10.1016/j.esr.2021.100638

Boğa, S. (2019), Determinants of Foreign Direct Investment: A Panel Data Analysis for Sub‑Saharan African Countries, “Emerging Markets Journal”, 9 (1), pp. 79–87, https://doi.org/10.5195/emaj.2019.175
Google Scholar DOI: https://doi.org/10.5195/emaj.2019.175

Bryna, M. (2021), Determinants of foreign direct investment: Evidence from provincial level data in Indonesia, “The Journal of Asian Finance, Economics and Business”, 8 (5), pp. 53–60.
Google Scholar

Çevis, I., Çamurdan, B. (2007), The Economic Determinants of Foreign Direct Investment in Developing Countries and Transition Economies, “The Pakistan Development Review”, 46 (3), pp. 285–299, https://doi.org/10.30541/v46i3pp.285-299
Google Scholar DOI: https://doi.org/10.30541/v46i3pp.285-299

Coy, R., Cormican, K. (2014), Determinants of foreign direct investment flows to developing countries: A cross‑sectional analysis, “Prague Economic Papers”, 4, pp. 356–369.
Google Scholar

Craigwell, M.F.A.W.R (2012), Economic growth, foreign direct investment and corruption in developed and developing countries, “Journal of Economic Studies”, 39 (6), pp. 639–652, https://doi.org/10.1108/01443581211274593
Google Scholar DOI: https://doi.org/10.1108/01443581211274593

Demirhan, E., Masca, M. (2008), Determinants of foreign direct investment: An analysis of Japanese investment in Ireland using the Kano model, “Investment Management and Financial Innovations”, 11 (1), pp. 8–17.
Google Scholar DOI: https://doi.org/10.18267/j.pep.337

Denisia, V. (2010), Foreign direct investment theories: An overview of the main theories, “European Journal of Interdisciplinary Studies”, 2 (2), pp. 104–110.
Google Scholar

Dunning, J.H. (1988), The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions, “Journal of International Business Studies”, 19 (1), pp. 1–31, https://doi.org/10.1057/palgrave.jibs.8490372
Google Scholar DOI: https://doi.org/10.1057/palgrave.jibs.8490372

Erdogan, M., Unver, M. (2015), Determinants of Foreign Direct Investments: Dynamic Panel Data Evidence, “International Journal of Economics and Finance”, 7 (5), pp. 82–95, https://doi.org/10.5539/ijef.v7n5p82
Google Scholar DOI: https://doi.org/10.5539/ijef.v7n5p82

Ezeoha, A.E., Cattaneo, N. (2012), FDI Flows to Sub‑Saharan Africa: The Impact of Finance, Institutions and Natural Resource Endowment, “Comparative Economic Studies”, 54 (3), pp. 597–632, https://doi.org/10.1057/ces.2012.18
Google Scholar DOI: https://doi.org/10.1057/ces.2012.18

Gui‑Diby, S. (2014), Impact of foreign direct investments on economic growth in Africa: Evidence from three decades of panel data analyses, “Research in Economics”, 68 (3), pp. 248–256, https://doi.org/10.1016/j.rie.2014.04.003
Google Scholar DOI: https://doi.org/10.1016/j.rie.2014.04.003

Hintosova, A.B., Bruothova, M., Kubikova, Z., Rucinsky, R. (2018), Determinants of foreign direct investment: A case of the Visegrad countries, “Journal of International Studies”, 11 (2), pp. 222–235, https://doi.org/10.14254/2071-8330.2018/11-2/15
Google Scholar DOI: https://doi.org/10.14254/2071-8330.2018/11-2/15

Im, K.S., Pesaran, M.H., Shin, Y. (2003), Testing unit roots in heterogeneous panels, “Journal of Econometrics”, 115 (1), pp. 53–74, https://doi.org/10.1016/S0304-4076(03)00092-7
Google Scholar DOI: https://doi.org/10.1016/S0304-4076(03)00092-7

Jorgenson, D.W. (1963), Capital theory and investment behaviour, “The American Economic Review”, 53 (2), pp. 247–259.
Google Scholar

Kariuki, C. (2015), The Determinants of Foreign Direct Investment in the African Union, “Journal of Economics, Business and Management”, 3 (3), pp. 346–351, https://doi.org/10.7763/JOEBM.2015.V3.207
Google Scholar DOI: https://doi.org/10.7763/JOEBM.2015.V3.207

Kaur, M., Yadav, S.S., Gautam, V. (2013), Financial system development and foreign direct investment: A panel study for BRICS countries, “Global Business Review”, 14 (4), pp. 729–742.
Google Scholar DOI: https://doi.org/10.1177/0972150913501607

Kumari, R., Sharma, A.K. (2017), Determinants of foreign direct investment in developing countries: A panel data study, “International Journal of Emerging Markets”, 8 (3), pp. 240–257.
Google Scholar

Levin, A., Lin, C.F., Chu, C.S.J. (2002), Unit root tests in panel data: Asymptotic and finite‑sample properties, “Journal of Econometrics”, 108 (1), pp. 1–24, https://doi.org/10.1016/S0304-4076(01)00098-7
Google Scholar DOI: https://doi.org/10.1016/S0304-4076(01)00098-7

Long, C., Yang, J., Zhang, J. (2015), Institutional Impact of Foreign Direct Investment in China, “World Development”, 66, pp. 31–48, https://doi.org/10.1016/j.worlddev.2014.08.001
Google Scholar DOI: https://doi.org/10.1016/j.worlddev.2014.08.001

Lucas Jr., R.E. (1988), On the mechanics of economic development, “Journal of Monetary Economics”, 22 (1), pp. 3–42, https://doi.org/10.1016/0304-3932(88)90168-7
Google Scholar DOI: https://doi.org/10.1016/0304-3932(88)90168-7

Mahbub, T., Jongwanich, J. (2019), Determinants of foreign direct investment in the power sector: A case study of Bangladesh, “Energy Strategy Review”, 24, pp. 178–192, https://doi.org/10.1016/j.esr.2019.03.001
Google Scholar DOI: https://doi.org/10.1016/j.esr.2019.03.001

Majavu, A. (2015), The determinants of foreign direct investment inflows in South Africa, Masters Degree Thesis, University of Forthare, Unpublished Thesis.
Google Scholar

Makhoba, B.P., Zungu, L.T. (2021), Foreign direct investment and economic growth in South Africa: Is there a mutually beneficial relationship?, “African Journal of Business and Economic Research”, 16 (4), pp. 101–115.
Google Scholar

Malefane, M.R. (2007), Determinants of foreign direct investment in Lesotho: Evidence from co‑integration and error correction modeling, “South African Journal of Economic and Management Sciences”, 10 (1), pp. 99–106, https://doi.org/10.4102/sajems.v10i1.539
Google Scholar DOI: https://doi.org/10.4102/sajems.v10i1.539

Mansaray, M.A. (2017), Macroeconomic Determinants of Foreign Direct Investment Inflows and Impulse Response Function, “International Journal of Academic Research in Business and Social Sciences”, 7 (10), pp. 187–219, https://doi.org/10.6007/IJARBSS/v7-i10/3370
Google Scholar DOI: https://doi.org/10.6007/IJARBSS/v7-i10/3370

Melnyk, L., Kubatko, O., Pysarenko, S. (2014), The impact of foreign direct investment on economic growth: case of post communism transition economies, “Problems and Perspectives in Management”, 12 (1), pp. 17–24.
Google Scholar

Moosa, I.A. (2010), International finance: An analytical approach, McGraw Hill, Australia.
Google Scholar

Mottaleb, K.A., Kalirajan, K. (2010), Determinants of Foreign Direct Investment in Developing Countries: A Comparative Analysis, “The Journal of Applied Economic Research”, 4 (4), pp. 369–404, https://doi.org/10.1177/097380101000400401
Google Scholar DOI: https://doi.org/10.1177/097380101000400401

Mupimpila, C., Okurut, F.N. (2012), Determinants of foreign direct investment in THE Southern African Development Community (SADC), “Botswana Journal of Economics”, 9 (13), pp. 1–12.
Google Scholar

Okwu, A., Oseni, I., Obiakor, R. (2020), Does Foreign Direct Investment Enhance Economic Growth? Evidence from 30 Leading Global Economies, “Global Journal of Emerging Market Economies”, 12 (2), pp. 217–230, https://doi.org/10.1177/0974910120919042
Google Scholar DOI: https://doi.org/10.1177/0974910120919042

Piteli, E.E. (2010), Determinants of Foreign Direct Investment in Developed Economies: A Comparison between European and Non‑European Countries, “Contributions to Political Economy”, 29 (1), pp. 111–128, https://doi.org/10.1093/cpe/bzq004
Google Scholar DOI: https://doi.org/10.1093/cpe/bzq004

Pradhan, R.P. (2011), Determinants of Foreign Direct Investment in SAARC Countries: An Investigation Using Panel VAR Model, “Information Management and Business Review”, 3 (2), pp. 117–126, https://doi.org/10.22610/imbr.v3i2.924
Google Scholar DOI: https://doi.org/10.22610/imbr.v3i2.924

Rashed, A., Yong, C., Soon, S. (2021), Determinants of foreign direct investment in renewable electricity industry in Africa, “International Journal of Sustainable Energy”, 41 (8), pp. 980–1004.
Google Scholar DOI: https://doi.org/10.1080/14786451.2021.2016763

Romer, P. (1986), Increasing returns and long run economic growth, “Journal of Political Economy”, 94 (5), pp. 1002–1037.
Google Scholar DOI: https://doi.org/10.1086/261420

Sane, M. (2016), Determinants of Foreign Direct Investment Inflows to ECOWAS Member Countries: Panel Data Modelling and Estimation, “Modern Economy”, 7 (12), pp. 1517–1542, https://doi.org/10.4236/me.2016.712137
Google Scholar DOI: https://doi.org/10.4236/me.2016.712137

Silveira, E.M.C., Samsonescu, J.A.D., Triches, D. (2017), The determinants of foreign direct investment in Brazil: Empirical analysis for 2001–2013, “CEPAL Review”, 121, pp. 172–184.
Google Scholar

Tampakoudis, I.A., Subeniotis, D.N., Kroustalis, I.G., Skouloudakis, M.I. (2017), Determinants of Foreign Direct Investment in Middle‑Income Countries: New Middle‑Income Trap Evidence, “Mediterranean Journal of Social Sciences”, 8 (1), pp. 58–70, https://doi.org/10.5901/mjss.2017.v8n1p58
Google Scholar DOI: https://doi.org/10.5901/mjss.2017.v8n1p58

Tocar, S. (2018), Determinants of foreign direct investment: A review, “Review of Economic and Business Studies”, 11 (1), pp. 165–196, https://www.researchgate.net/publication/326154950_Determinants_of_Foreign_Direct_Investment_A_Review (accessed: 10.07.2022).
Google Scholar DOI: https://doi.org/10.1515/rebs-2018-0069

Tsaurai, K. (2017), The Dynamics of Foreign Direct Investment in BRICS Countries, “Journal of Economics and Behavioural Studies”, 9 (3), pp. 101–112, https://doi.org/10.22610/jebs.v9i3(J).1749
Google Scholar DOI: https://doi.org/10.22610/jebs.v9i3(J).1749

Tsaurai, K. (2020), Financial development‑poverty reduction nexus in BRICS: A panel data analysis approach, “Applied Econometrics and International Development”, 20 (2), pp. 19–32.
Google Scholar

Tsaurai, K. (2021), Determinants of Trade Openness in Transitional Economies: Does the Complementarity between Foreign Direct Investment and Human Capital Development Matter?, “International Journal of Economics and Business Administration”, IX (1), pp. 318–330, https://doi.org/10.35808/ijeba/675
Google Scholar DOI: https://doi.org/10.35808/ijeba/675

Wijaya, A.G., Astuti, D., Tarigan, Z.J.H., Edyanto, N. (2020), Determinants of foreign direct investment in Indonesia “Evidence from co‑integration and error correction modelling”, “SHS Web of Conferences”, 76, pp. 1–10, https://doi.org/10.1051/shsconf/20207601002
Google Scholar DOI: https://doi.org/10.1051/shsconf/20207601002

Wisniewski, M., Stead, R. (2007), Foundation quantitative methods for business, Prentice Hall, England.
Google Scholar

Yunus, N.M. (2020), Determinants of Foreign Direct Investment: An Analysis on Policy Variables in the Malaysian Manufacturing Industry, “International Journal of Asian Social Science”, 10 (12), pp. 746–760, https://doi.org/10.18488/journal.1.2020.1012.746.760
Google Scholar DOI: https://doi.org/10.18488/journal.1.2020.1012.746.760