An empirical analysis of the FDI and economic growth relations in Albania: A focus on the absorption capital variables

Abstract

Over the past three decades, Albania has had positive and increasing foreign direct investment (FDI) inflows that have brought significant changes in many economic sectors. The paper’s purpose is to analyze the dynamic relationship between FDI and economic growth, particularly emphasizing absorption capital variables. The research question is if the human capital development level, technological development, trade openness, public expenses, and financial system development in Albania help or hinder the materialization of the expected positive effect of FDI on economic growth? We used empirical analyses to evaluate these relationships based on the model created by Borensztein, De Gregorio, and Lee (1998). We changed a few variables in the model, and we used the multivariate vector autoregressive (VAR) model and the vector error correction model (VECM) to analyze the variables’ causal relationships. Some of the results achieved are consistent with other authors’ findings, so human capital is considered an essential element of host countries’ absorptive capacity. In the long run, in Albania, the FDI’s impact on economic growth positively affects human capital development, especially on knowledge and expertise and financial system development. However, the technological difference index gives a negative long-term impact on economic growth, and trade opening is statistically insignificant.