Abstract
The aim of this paper is to provide clear insight about the determinants and role of FDI in transition country with particular reference in FYR of Macedonia. We are using a panel dataset for twenty seven - 27 transition countries over the period 1997 to 2009. Applying static and dynamic modeling, econometrics findings have driven as to dynamic models. Inthe same empirical investigations following variables have been tested: GDP of the host and source country, unit labour cost, trade inflation, legal environment, distance, dummy variables capturing the language, common border and colonizing effect. Empirical result confirms expectation of the chosen variables as well as the positive feedback effect of past FDI onto current FDI. While the negative and significant coefficient of distance indicates that FDI is determined by gravity factors, the positive relationship between FDI stock and unit labour cost is explained through the effect of the service sector on wages. In addition, countries having higher trading shares attract more FDI. Low inflation rate as well as efficient legal system should be taken as a good sign for attracting more FDI flows since it has a positive impact on foreign investors. Dummy for English language, which indicates countries where English language is official or widely spoken in that country, have less language difficulties and more FDI flows with FYR of Macedonia.At the same time, income level of the host country is found to be important determinant for foreign investors. Moreover, FDI role in FYR of Macedonia has been found as crucial in many aspects of country’s economic development and sustainability. Apart from accelerated growth, technical innovation and enterprise restructuring, FDI in this transition country gave considerable contribution to the financial potential improvement.
Highlights
Foreign direct investment (FDI) is taken as one of the key factor of rapid economic growth and development in transition countries which seems to suffer from structural weaknesses and unsustainable economic growth
FDI has a positive impact on the economies of host countries
The positive relationship between FDI stock and unit labour stock is explained through the effect of the service sector on wages and the fact that after the first phase of transition the importance of these determinants declines and other factors such as business environment become more important (Demekas et al.,2005)
Summary
Foreign direct investment (FDI) is taken as one of the key factor of rapid economic growth and development in transition countries which seems to suffer from structural weaknesses (low productivity, low employment, social exclusion, constrained competitiveness) and unsustainable economic growth. Positive spillovers are more likely to be detected from countries with a relatively high level of absorptive capacity (in terms of human capital, quality of governance etc.) which in turn allows countries to take advantage of financial globalization (Borenzstein et al 1998) For this reason we have tried to find the determinants which have a directly and inderectly influenced the transition countirs economy. Political instability in the region, traditionally low level of intraregional trade, relatively small size of the markets and high level of corruption have deterred foreign investors from investing in FYR of Macedonia (Slavevski and Nedanovski, 2002) For this reason we have considered that is important to highlight the common determinates and role of FDI in this country. The study is summarized in the fifth section giving conclusions and possible extensions
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