Models of Foreign Direct Investments Influence on Economic Growth. Evidence from Romania

Abstract

Last decades developing and emerging countries' priorities shifted towards international capital flows, as a complementary way to finance domestic economic growth. But also last years capital flows and their components are affected by domestic and global crisis that frequently destabilize both developed and developing economies. Central and Eastern Europe countries are looking for foreign direct investments as a critical component to solving capital deficit problem. But the causality relation between foreign direct investments and growth is not necessary unidirectional: several theoretical works argued that foreign direct investments is a direct result of growth but other studies show that foreign direct investments generate economic growth. In our paper we propose to model the relationship between foreign direct investment and economic growth in transition countries, especially in Romania. We use a neoclassical model with Cobb-Douglas production functions to analyze the effects of FDI on Romanian growth, followed by a short term GDP prognosis. Our basic results show that Romanian economic growth was positively influenced by fiscal policy, FDI and also by adhesion to EU.