Internationalization and Economic Growth: The Comparison of European Economies

Abstract

The paper analyses the internationalization of European economies focusing on ten new member states (NMS-10: Cyprus, the Czech Republic, Estonia, Hungary, Lithuania, Latvia, Malta, Poland, Slovakia, and Slovenia). The degree of internationalization is measured by macroeconomic aggregates, particularly by foreign direct investment (FDI) and international trade. The focus is on the association between FDI and economic growth.The research literature argues on an existing linkage between internationalization of economies through international trade and FDI flows, and economic growth. The integration and accession of the NMS-10 into European Union (EU) is expected to contribute essentially to the increasing of trade and FDI flows.The paper focuses on NMS-10 and compares the impact of FDI and exports on the economic growth before and after their accession to EU, as well as compares the economic internationalization of the NMS-10 with EU-15 countries. We aim to establish the influence of the economic integration on trade and FDI flows. While several studies focus on the influence of inward FDI on host country’s economy, we aim to assess the impact of both inward and outward FDI on the economic growth. The research uses panel data for the period 2000-2008 in a regression framework analysis.Our main hypothesis is that foreign trade and investment liberalization have provided crucial incentive for the ascension of foreign trade and FDI flows in NMS-10 countries, which in a turn have had a positive impact on their economic growth.The findings and implications are useful for predicting the changes in foreign trade and FDI flows for the future members of EU, induced by their accession into EU, as several studies emphasize the high foreign trade and FDI performance as a success determining factor of the European integration process with important managerial and policy implications.