Trade, Foreign Direct Investment and Economic Growth in Albania. Evidence from Time Series

Abstract

Trade and Foreign Direct Investment has been treated as crucial factors underlying the relative growth rates experienced by the Albanian Economy, especially during the late years, thus, boosting economic growth in the country and improving the degree of integration of the Albanian economy into the World markets. The paper aims to provide an empirical assessment of the relationship between Trade, Foreign Direct Investment, and Economic Growth in Albania, by examining Trade and FDI nexus growth interactions using yearly time series data for a time span of 1993-2018. For this purpose, we employed cointegration analysis and Granger causality analysis. The co-integration tests, based on Vector Error Correction Mechanism (VECM), confirm the presence of a long-run relationship between the variables. VECM results support a negative relationship between trade and GDP in the long-run and a positive relationship between trade and FDI. Granger Causality tests support the causality evidence of one-directional reinforcement of GDP on trade in Albania and changes in GDP and trade are causing changes in FDI. The VAR analysis confirms that changes in GDP and FDI are encouraging changes in trade. The paper outlines policy implications with respect to promoting relevant institutional policies for the enhancement of trade and FDI activities in the country, which potentially could enhance economic growth in the country.