The Impact of Fiscal Policy on FDI in the Context of the Crisis. Evidence from Central and Eastern European Countries

Abstract

Fiscal policy is an important tool in the hand of the central authorities, through which they may influence the distribution of income, the allocation of resources and also the economic activity. On overall, the fiscal policy changes will be reflected in macroeconomic variables, such as GDP, government budget, government debt and also foreign direct investment (FDI). The 2007 financial crisis had a major impact on all economies and each country has applied several fiscal policy measures in order to stabilize their economies. This paper aims to analyze the impact of fiscal policy on FDI for Central and Eastern European countries (EU members) in the context of the recent global crisis. The crisis had a major impact on economic activity of the region, although the magnitude of the impact differed notably, depending on the characteristics of each country economy. In order to highlight this, we use a regression model and panel data methodology, trying to find the most important fiscal policy instruments that influenced the level of FDI for the analyzed countries. The results will be very useful if there is a pattern for different countries regarding the power of a specific fiscal policy instrument in influencing the FDI flows. We expect that, at least one of the two most important instruments of fiscal policy - government revenue (tax revenue) and government expenditure – to have an important impact on FDI level, being a signal that at least some regulation measures applied achieved their goal of stabilizing and helping the economies affected by crisis to recover.