Abstract
Croatia is characterised by a foreign direct investment (FDI) inflow, mainly in the service sector, which is partly understandable owing to the country's orientation towards tourism. On the other hand, theoretical and empirical research indicates a weak impact of FDI in the service sector on the economic growth of the recipient country. Following the theoretical framework and critical analysis of previous research, the paper, on the example of Croatia in the period q1/2000 - q3/2020, uses the VAR model to analyse the mutual influence of GDP growth rate and FDI in the service sector. The results show that the impact of the GDP growth rate on the FDI inflow into the service sector is more significant and longer lasting than vice versa. The paper emphasises the importance of the adopted growth model for the type of FDI inflows into the recipient country, which in this case is characterised by the appreciation of the real exchange rate as an indicator of the country's competitiveness, whose impact on FDI inflow into the service sector is positive and long lasting.
Highlights
Foreign direct investment (FDI) is the most significant form of international capital flows and, given its presumed macroeconomic characteristics, the most desirable
Apart from the total capital inflows, which is most often linked to the effect on the country's economic growth, there are few works linking the sectoral structure of foreign direct investment and the country's economic growth (Walsh and Yu, 2010., Kinoshita, 2011)
This paper aims at analysing the relationship between FDI in the service sector and economic growth in Croatia
Summary
Foreign direct investment (FDI) is the most significant form of international capital flows and, given its presumed macroeconomic characteristics, the most desirable. The thesis of the paper is that the dominant FDI inflow into the service sector is a result of the growth model based on increased domestic absorption due to real exchange rate appreciation and can be explained through the concept of so-called Dutch disease. The results obtained by analyzsng the VAR model indicate a negative and persistent effect of the shock of the FDI inflow in the service sector on the GDP growth rate, with a reverse effect being observed in in the opposite case. As an additional variable in the VAR model, the trade balance variable (in % of GDP) hs been used as an indicator of the state of foreign trade, primarily based on the investment inflow into the service, not necessarily export-oriented (manufacturing) sector
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