Abstract
After the fall of communism, Central and Eastern European countries have experienced a transition process in which a remarkable increase is observed in foreign direct investment flows into the region. During this process, when transition countries tried to adopt a free-market economy instead of a closed centrally structured economy, funds obtained through FDI constituted an essential way of financing for these countries that were trying to restructure their economy. Study questions the existence of the crowding-out effect by using data from Eastern European Countries, including Romania, the Russian Federation, Moldova, Poland, Bulgaria, Hungary, Slovak Republic, Ukraine. With this aim, PANIC Bai and Ng (2004), the bias-corrected PANIC Westerlund and Larsson (2009) unit root tests, and panel data analysis are implemented. Results obtained were consistent with theoretical expectations and showed that FDI had a crowding-out effect in the short run but, in the long run, a crowding-in impact on domestic investment.
Highlights
There is a long debate about the interaction between FDI, economic growth, and domestic investment
The results showed that, FDI crowds out domestic investment for older 14 members, it does not have a negative effect on domestic investment in the new EU members in the long run
FDI constitutes an essential factor for economic development, it alone is not sufficient
Summary
There is a long debate about the interaction between FDI, economic growth, and domestic investment. During the 1970s, foreign investment, which was charged with generating a monopoly in the industry in which it was invested, was perceived as detrimental to recipient economies (Markusen and Venables,1999, p.336). Developing economies’ perceptions of foreign investment changed in the 1980s. 1980s, financial liberalization policies adopted by developing economies caused FDI to trend upward in these countries. FDI has been more advantageous than other types of international capital for the host country since it is less volatile, less prone to reversals, and less exposed to political collateral. According to Lensink and Morrissey (2006), FDI protects recipient countries from unexpected shocks through these advantages. As opposed to debt, if FDI is not successful, the
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