Exploring the Nexus Between Foreign Direct Investment Inflows and Economic Growth: A Robust Empirical Analysis of European Low- and Middle-Income Countries

Abstract

Understanding the relationship between foreign direct investment (FDI) inflows and economic growth is essential for enhancing output, introducing new technologies, and developing managerial capabilities. The study addresses a gap in the literature regarding FDI and economic growth in low- and middle-income European countries from 1995 to 2022. Employing various econometric methods, including Dynamic GMM, Hausman-Taylor IVs, Fixed Effects, Pooled OLS, and Random Effects, the analysis reveals a negative relationship between economic growth and FDI inflows. The finding suggests that FDI does not necessarily lead to improved economic performance. Additionally, trade openness negatively impacts FDI levels, while increased R&D and inflation positively influence these dynamics. The effects of tertiary education, ease of doing business, and corruption control are mixed, with strong rule of law being a significant attractor for FDI. These insights provide valuable guidance for policymakers in low- and middle-income European countries aiming to formulate effective strategies for attracting foreign investments and fostering economic growth.