Causal Links between Trade Openness and Foreign Direct Investment in Romania

Bianca Tescașiu,Malsha Mayoshi Rathnayaka Mudiyanselage,Gheorghe Epuran

doi:10.3390/jrfm14030090

Bianca Tescașiu, Malsha Mayoshi Rathnayaka Mudiyanselage + Show 1 more

Open Access

https://doi.org/10.3390/jrfm14030090

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Abstract

In this increasingly globalized era, foreign direct investments are considered to be one of the most important sources of external financing for all countries. This paper investigates the causal relationship between trade openness and foreign direct investment (FDI) inflows in Romania during the period 1997–2019. Throughout this study, Trade Openness is the main independent variable, and Gross Domestic Product (GDP), Real Effective Exchange Rate (EXR), Inflation (INF), and Education (EDU) act as control variables for investigating the relationships between trade openness (TOP) and FDI inflow in Romania. The Auto Regressive Distributed Lag (ARDL) Bounds test procedure was adopted to achieve the above-mentioned objective. Trade openness has negative and statistically significant long-run and short-run relationships with FDI inflows in Romania throughout the period. Trade openness negatively affects the FDI inflow, which suggest that the higher the level of openness is, the less likely it is that FDI will be attracted in the long run. The result of the Granger causality test indicated that Romania has a unidirectional relationship between trade openness and FDI. It also showed that the direction of causality ran from FDI to trade openness.

Highlights

In this increasingly globalized era, foreign direct investments are considered to be one of the most important sources of external financing for all countries
The results indicated that exchange rate and and Pooled OLS techniques employed of panel data were used for measuring individual inflation were used as a proxy for macroeconomic stability and Gross Domestic Product (GDP) per capita variables country effect, group effect, and time effect
The results indicated that inflation rate, exchange rate, and interest rate had statistically significant negative effects on foreign direct investment (FDI) in Ghana, while gross domestic product, electricity production, and TU had a positive effect on FDI both in the long-run and short-run

Summary

Introduction

In this increasingly globalized era, foreign direct investments are considered to be one of the most important sources of external financing for all countries. This paper investigates the causal relationship between trade openness and foreign direct investment (FDI) inflows in Romania during the period 1997–2019. Gross Domestic Product (GDP), Real Effective Exchange Rate (EXR), Inflation (INF), and Education (EDU) act as control variables for investigating the relationships between trade openness (TOP) and FDI inflow in Romania. The result of the Granger causality test indicated that Romania has a unidirectional relationship between trade openness and FDI. Trade openness is defined as the sum of imports and exports normalized by the gross domestic product This is the most common and convenient measurement, and has been used in a variety of international studies (Adow and Tahmad 2018; Zaman et al 2018; Ho et al 2013; Nguyen and Nguyen 2007)

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