The impact of foreign direct investment on the economic development of emerging countries of the European Union

• Published date: 01 April 2023
• Author: Adriana Burlea‐Schiopoiu,Simina Brostescu,Liviu Popescu
• Date: 01 April 2023
• DOI: http://doi.org/10.1002/ijfe.2530

RESEARCH ARTICLE

The impact of foreign direct investment on the economic

development of emerging countries of the European Union

Adriana Burlea-Schiopoiu

1

| Simina Brostescu

2

| Liviu Popescu

2

1

Department of Management, Marketing,

Business Administration, Faculty of

Economics and Business Administration,

University of Craiova, Craiova, Romania

2

Department of Statistics and Economic

Informatics, Faculty of Economics and

Business Administration, University of

Craiova, Craiova, Romania

Correspondence

Adriana Burlea-Schiopoiu, Department of

Management, Marketing, Business

Administration, Faculty of Economics and

Business Administration, University of

Craiova, 13, Street A.I. Cuza,

Craiova, Romania.

Email: adriana.burlea@gmail.com

Abstract

Starting from the premise that the impact of foreign direct investment (FDI)

on the economies of the host countries is different from one economy to

another, the aim is to evaluate the impact of a set of economic and social indi-

cators on FDI and net income (% GDP–Gross Domestic Product) in emerging,

ex-socialist countries of the European Union. Using econometric models, we

analysed the relationship between the evolution of the net FDI inflows and a

number of statistical indicators. Our findings proved that there are similarities

between the countries analysed, in terms of the evolution of net FDI inflows,

with some differences being recorded for Hungary, where the evolution of net

FDI inflows has major fluctuations. We found that the countries present both

similarities and differences in terms of variables that affect FDI. The FDI net

inflows (% GDP) are in seven, out of nine economies, positively influenced by

GDP, as it follows: Bulgaria, Lithuania and Slovenia are FDI attractive by an

increasing GDP rate, while Latvia, Poland and Romania react to a better GDP

per capita. Hungary is the only one that is positively influenced by both GDP

rate and GDP per capita. Moreover, a decreasing corruption perception index,

country risk rating, income tax (% of commercial profit) and other taxes paid

by companies (% commercial profit) can positively influence the inflows of

FDIs in some of the analysed countries.

KEYWORDS

corruption perception index, country risk rating, economic development, economic freedom

index, foreign direct investment

1|INTRODUCTION

The impact of foreign direct investment (FDI) on the econ-

omies of the host countries is different from one economy

to the next, depending on the specific, concrete conditions

existing at the social, cultural, educational and political

levels for each country, as well as the degree of prior pene-

tration of the foreign capital. Therefore, we consider it

important to identify the possible correlations between FDI

and a number of economic and social indicators, starting

from the premise that statistical indicators can represent

explanatory factors for the variation of the investment phe-

nomenon in various countries. The FDI stimulation poli-

cies adopted by countries, such as Bulgaria, Croatia, Latvia,

Lithuania, Hungary, Poland, Romania, Slovenia and Slova-

kia, have led to an increase in gross domestic product

(GDP), which in some cases exceeded 8%–10%, against the

background of general strategies for accession to the

European Union.

In emerging markets and economies such as those in

EU member countries that come from the communist

bloc, FDI is an efficient way for the company that invests

Received: 15 May 2020 Revised: 28 December 2020 Accepted: 9 January 2021

DOI: 10.1002/ijfe.2530

2148 © 2021 John Wiley & Sons, Ltd. Int J Fin Econ. 2023;28:2148–2177.wileyonlinelibrary.com/journal/ijfe

in these markets to increase their profitability, and also

for the countries that attract FDI as an instrument to

improve their institutions and to significantly contribute

towards increasing their GDP (Soumaré & Tchana

Tchana, 2015). In order to identify a viable regression

model, several scenarios were tested that had FDI as

endogenous variables, and economic and social indica-

tors as exogenous variables. The main stages of the

research were as follows: selecting the dependent variable

and the independent variables, testing the model hypoth-

eses and interpreting the results. The aim of our research

is to analyse a set of indicators (period: 2007–2017) that

have the potential to predict the development of FDI as

far as each of the economies of the countries under analy-

sis is concerned.

Through our research, we aim to answer the follow-

ing questions:

•What impact do economic and social indicators have

on FDI in the countries under analysis?

•Which of the indicators are ubiquitous in the regres-

sion models validated?

•What measures are needed to generate FDI growth in

the countries analysed?

Our article has the following structure: the literature

review intended as a grounding of a critical analysis of

the state-of-the-art in the domain; the methodology used;

results and discussion; then we made a synthesis of our

research, followed by a conclusion section.

2|LITERATURE REVIEW

The financial econometric modelling of investment in the

Eastern and Central European countries has seen pro-

found diversification over the last period of time, and the

resulting models have expanded into complex factor areas

of FDI, which are important through their economic

impact (Cuevas, Messmacher, & Werner, 2005; Latorre,

Olekseyuk, & Yonezawa, 2020;S



avoiu & Popa, 2012).

In the literature, there are a variety of econometric

models related to FDI, which have a clearly definite

degree of originality and arise special interest in antici-

pating some economic developments (Sevinc & Mata

Flores, 2020).

In relation to the signal conveyed by a set of relevant

international statistical indicators, one can mention sev-

eral types of modern econometric models in the special-

ized literature:

1. Models that quantify the correlation between FDI and

country risk rating as the major exogenous variable,

or one that is coupled with other social variables

(Thomas, 2006), ranking national economies

(J. Vijayakumar, Rasheed, & Tondkar, 2009), empha-

sizing regional variations (Lee & Rajan, 2011), antici-

pating crises or outlining the specificity of some

transitions and accessions (S

avoiu, Dinu, & Ciuc

a,

2013;S



avoiu & Ţaicu, 2014);

2. Models that describe a positive/negative relationship

between corruption and FDI, increasing the impact or per-

ception of corruption by multiplying/demultiplying the vol-

ume of investments (Barassi & Zhou, 2012;Udenze,2014);

3. Models focusing on statistical indicators derived from

the broad concept of economic freedom generating

GDP growth (Wells & Wint, 2000), export flows

(Greenaway & Kneller, 2007), capable of delimiting

risks of economic instability (Jinjarak, 2007), political

instability (H. Kim, 2010), stimulating multinational

corporations through national tax policies or through

the number and categories of taxes (Weichenrieder &

Mintz, 2008), by favouring the interference of multina-

tional corporations (Görg & Jabbour, 2009; Groba &

Serrano, 2020) and the health of the banking system

(Ushijima, 2008) through inter-regional agreements

(Davis, 2011), or even trying to explain the FDI dynam-

ics through the value evolution of the economic free-

dom index (Caetano & Caleiro, 2009;Rož

ans, 2016).

Most of the econometric models that approach the

FDI problem are the result of the classical statistical theo-

ries, based on:

•The correlation between FDI and economic growth

(FDI–GDP), where FDI has the quality of exogenous

factor, in most cases

•General or alternative macroeconomic systematization

of FDI, in which case FDI are modelled as both exoge-

nous and endogenous

•Modern syncretism and continuous transformation of

factors, with FDI becoming predominantly an endoge-

nous factor

The variability of the eclectic classical models is also

the result of the diversity of databases focused on value

indicators, on ratios and statistical indices, as well as

indicators of the structural type.

The main classes of foreign direct investment (FDI)

models describe and bring together:

Models derived from the economic conceptualization

of FDI;

•Classical statistical models, focusing on the correlation

between economic growths (GDP) and FDI

•Classical theoretical structural models of FDI

BURLEA-SCHIOPOIU ET AL.2149