Foreign Direct Investment Drivers and Growth in Central and Eastern Europe in the Aftermath of the 2007 Global Financial Crisis

Abstract

Our paper provides new insights on the developments and the drivers of foreign direct investment (FDI) in Central and Eastern European countries over the period 1993–2014, whilst taking into account the occurrence of the 2007 and 2011 crises. We apply a panel data general-to-specific approach and show that FDI inflows are driven by both external (i.e. macroeconomic and financial conditions in the euro area, global macroeconomic conditions and global risk environment) and domestic determinants (past FDI, human capital, market size, infrastructure, competitiveness, corporate tax system, risk premium, trade openness, geographical proximity to Western Europe, accession to the European Union and progress in implementing structural reforms). In addition, through a dynamic panel data analysis, we find a positive impact of FDI inflows on economic growth. We show that, despite the severe decline in FDI and real GDP growth rates at the onset of the 2007 crisis, the positive impact of FDI inflows on economic growth has amplified during this crisis, whilst it has become non-significant during the 2011 crisis.

Keywords: Foreign direct investment, Central and Eastern Europe, Economic growth