The Determinants of FDI Inflows in Romania

Abstract

The growth of foreign direct investment around the world has been significant in recent years. It is a critical element of any and every nation's economy, including Romania's. The main objective of the study is to examine the potential determinants of FDI inflows in Romania during the period from 1997 to 2019. We employed the Autoregressive Distributed Lag (ARDL) bound co-integration technique to identify the potential determinant factors of FDI inflows such as trade openness, gross domestic product, interest rate, education level of the labor force, exchange rate, inflation, and control of corruption. As per the findings, the log of gross domestic product and labor force education variables have a positive impact on inbound FDI, whereas trade openness has a negative impact in the long run. In the long run, other variables, such as interest rates, real effective exchange rates, and corruption control variables, cannot explain the variation in inbound FDI. In the short run, the log of gross domestic product, labor force education, real effective exchange rate, and corruption control explain the variation in FDI inflows, although the interest rate and inflation are insignificant. The findings revealed some important policy implications, including the need to maintain a stable exchange rate and promote strong open trade policies to improve the investment climate, increase gross domestic product to create needed markets for foreign investors, improve labor force education by introducing training and workshops, and control corruption by implementing rules that are more effective.