FDI and growth: evidence from a panel of european transition countries

Abstract

This paper studies the effects of Foreign Direct Investment (FDI) on economic growth, measured by the increase in per capita growth of GDP for ten European countries in transition, utilising an unbalanced panel data set of annual observations from 1990 to 2003. The net inflows of foreign investments, and the net portfolio investments, both as a percentage of GDP, are used as FDI proxies. The results show that planned foreign investments have a positive and significant effect on the economic growth of these economies. On the other hand, portfolio investments are found to have a negative and insignificant effect. These results could be explained by the fact that stock markets are not fully developed in transition countries, while their relatively cheaper labour makes them quite attractive to planned FDI