The Dynamic Links Between Exports, Foreign Direct Investment, and Economic Growth: Evidence from European Transition Economies

ABSTRACT

By applying time series and panel data cointegration analysis, this study investigates the causal relations between exports, inward FDI and GDP for fifteen European transition economies over the period 1995–2014. This study goes beyond previous empirical works by using two auxiliary variables in the aforementioned nexus: domestic investment and government spending. Empirical findings suggest that though the effect of openness is beneficial to all economies of the region, the presence of export-led growth and FDI-led growth hypotheses are validated mainly for the group of economies that entered the European Union in 2004. Conversely, for the remaining economies, the results confirm the prevalence of a culture for saving over spending, which eventually provokes the beneficial expansion of their local investment and export capacity.

KEYWORDS:

• Exports
• FDI
• GDP
• panel data analysis
• time series analysis
• transition economies

Notes

For Serbia and Bosnia and Herzegovina, we had merely 18 annual observations (over the period 1997–2014) for the inward FDI variable; hence, we were unable to perform individual VECM analysis using the econometric package EViews 9.

For example, the seminal studies of Hsiao and Hsiao (2006) and De Mello and Fukasaku (2000) conducted time-series analysis with approximately 20 observations for Asian and Latin American economies, respectively.

Provided by the econometric package EViews 9.

Structural and investment funds for the members of the European Union and Instrument for Pre-Accession Assistance for the European Union candidates’ countries.