Does Foreign Direct Investment and Trade Promote Economic Growth? Evidence from Albania

Dimitrios Paparas,Sam Hobbs,Mostafa E Aboelsoud

doi:10.3390/economies9010001

Dimitrios Paparas, Sam Hobbs + Show 1 more

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https://doi.org/10.3390/economies9010001

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Abstract

Albania has experienced a rapid transition from a centrally planned economy to a mixed economy since the fall of communism in 1989. Policy changes, trade liberalization, and privatization have come about at a rapid pace, allowing foreign direct investment (FDI) and international trade to become key components of Albania’s economy. Against this backdrop, this study investigates the relationships among FDI, trade, and economic growth in Albania. Annual time-series data were obtained from the World Bank. Then, the following econometric tests were performed on the variables representing FDI inflows, exports, and GDP as proxies for FDI, trade, and economic growth: the unit root test; the unit root test with a structural break; Johansen cointegration analysis; the error correction model; and the Granger causality test. The results revealed a long-term relationship between FDI, trade, and economic growth. The Granger causality tests found unidirectional causality. Economic growth brought about exports and FDI in the short term but not vice versa. In conclusion, policymakers need to design policies that promote technology-based, export-promoting FDI to meet the needs of the economy and develop specialized sectors that are competitive in the global market. Furthermore, the salient takeaway is that the penetration of export markets should be promoted as much as the furtherance of FDI.

Highlights

The study of the relationship between foreign direct investment (FDI) and economic growth has been of great interest to both academics and policymakers
Globalization has been characterized by the growing interdependence of economic actors across countries and has witnessed trade barriers lowered and other incentives doled out to stimulate FDI, which accounts for 10% of global gross fixed capital formation (Alfaro and Chauvin 2016; Vendrell-Herrero et al 2018)
For the null hypothesis to be rejected, the Augmented Dickey–Fuller (ADF) t-statistic must be more negative than the critical value at the 5% significance level

Summary

Introduction

The study of the relationship between foreign direct investment (FDI) and economic growth has been of great interest to both academics and policymakers. Globalization has been characterized by the growing interdependence of economic actors across countries and has witnessed trade barriers lowered and other incentives doled out to stimulate FDI, which accounts for 10% of global gross fixed capital formation (Alfaro and Chauvin 2016; Vendrell-Herrero et al 2018). FDI has been regarded as the most stable and prevalent component of foreign capital inflows in developing and transition countries. A preponderance of studies shows that FDI stimulates technology spillovers, develops human capital, and creates a more competitive business environment. All of these factors promote economic growth, which is essential toward alleviating poverty and increasing welfare standards (Adams 2009; Moran 2012). Empirical research on FDI’s real effect on economic growth remains inconclusive and ambiguous

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