F21 - International Investment; Long-term Capital MovementsReturn

The infrastructure investment could strongly influence the economic growth in the Western Balkans countries and contribute to improved regional cooperation and reconciliation and to faster integration into the EU. However, it is essential that public investments in infrastructure are properly financed and managed. To measure the impact of infrastructure indicators on economic growth, panel regression analysis was used for the period 2000-2021, in six Western Balkan countries. The paper addresses the important question of how to intensify investments in infrastructure to achieve sustainable growth in the Western Balkans. The obtained results confirm the earlier findings about the significant impact of energy, ITC, and road infrastructure on economic growth in the Western Balkans.

The paper explores the interconnections between foreign capital flows and the exchange rate regime switching in developing countries. We formulate the exchange rate regime switching as annual time series of binary/ordered variables employing de facto classification of exchange rate arrangements and regress them on the financial account capital flows for a panel of 28 developing countries which experienced change in their exchange rate regime during the period 2000-2016. Employing probit and logit regression, we discover the FDI, portfolio flows and changes in reserve assets to precede and/or coincide with switching. Specifically, accumulation of foreign reserves increases the probability of switching from floating to peg, while their spending coincides with exits from pegged regimes; at the same time, outflows of FDI and portfolio investments tend to accompany exchange rate regime liberalization, although the evidence on that is less consistent.

Foreign banks have played a major role in Central and Eastern European economic landscape over the last decades. They have spurred banking intermediation and fuelled economic growth for years. However, the global financial crisis unveiled the other side of the coin. This article analyses foreign banks' lending behaviour in Central and Eastern Europe over the period from 2000 to 2016. It aims to investigate the nexus between bank loan growth, cross-border bank claims and the cycle period. Moreover, it captures the impact of the financial cycle on foreign banks' credit behaviour and highlights whether foreign bank ownership is influenced by host- and home-country effects. Our findings reveal the strong nexus between foreign banks' loan growth and cross-border bank claims. Also, we emphasize the pro-cyclicality of foreign banks' loan growth and cross-border bank claims. Furthermore, we see clear differences related to foreign banks' lending behaviour during normal and turbulent times, triggered by host- and home-country effects. These results raise policy challenges regarding the right bank ownership balance and the use of prudential regulation.

This paper investigates whether inflows of FDI and innovative activities act as a channel of knowledge spillovers in improving quality of countries' output. In measuring export quality, sophistication of a country's export basket is utilized. Utilizing panel data of countries for the period 2002-2015 and applying GMM methodology, the results indicate that the level of financial development, the quality of human capital and globalization of a country have a determinant role on the relation between knowledge spillover channels and the quality of exports. Patent applications generally positively affect sophistication of exports. FDI serves as a channel for knowledge spillovers to benefit the sophistication level of exports only for developed, more educated, financially developed and globalized countries.

In this article we analyse the impact of the interaction between cross-border mergers and acquisitions and the quality of the institutional setting on domestic investment using panel data for 22 European transition countries from 2000 to 2014. We investigate whether the progress and durability of institutional reforms have a crucial influence on the economic performance of cross-border mergers and acquisitions in transition countries. Our empirical findings indicate that contemporaneous cross-border mergers and acquisitions have a crowding-out effect on domestic investment in the year of merger or acquisition, but the influence of their lagged level has a strong crowding-in effect one year later. We find that the overall quality of the institutional setting and the rule of law negatively and significantly affect the relation between this type of foreign direct investment and domestic investment, both in the short and long run. Political stability exhibits a positive and significant impact on domestic investment in the current period and over time.

This paper is an application of the consumption-smoothing current account theory the main principles of which appeared in the 1980s and gradually broadened to describe the intertemporal dynamics of important economic processes. In open economies, the consumption-smoothing current account process is related to the consumption behaviour of households. The effect on consumption choices and the current account is derived from the premise that households adjust their consumption expenditures according to the terms of trade. The process can be treated in an optimizing framework and originally was strictly connected to the permanent income hypothesis (PIH) and no restrictions to capital mobility. Both assumptions were successively relaxed and relationships allowing incorporation of the excess sensitivity hypothesis (ESH) and not perfect capital mobility have been introduced. Transformed into a VAR model with current account and national cash flow increments as endogenous variables, relevant conclusions are drawn on the basis of Granger causality, the equivalence of the current and predicted current account and an analysis of parameters of the model. Basic relationships and solutions are summarized and an application using the economies of the Czech Republic, Slovakia and Austria follows.

The aim of this paper is to examine the interaction patterns between equity and real estate returns in 8 emerging economies from Central and Southeastern Europe. For that purpose we apply the TAR model entailing two regimes and endogenously determined threshold, delay parameter, and lag length. The results suggest that in all the countries, the interaction between equity and real estate returns is subject to regime switching in at least one direction. Equity returns in general seem to be much more sensitive to real estate returns changes, while the reaction of real estate returns to changes in equity returns is not always present and it is much more subdued and delayed. In the majority of the countries, the value of the threshold is large and negative suggesting that equity returns (real estate returns) react differently to large negative changes of real estate returns (equity returns) when compared to changes of different magnitudes and alternative signs. Equity returns react more strongly to large negative changes of the real estate returns than to small negative or positive real estate returns changes, while the reaction of the real estate returns to the equity returns changes varies across countries, making neither regime more prevalent.

The paper quantifies the role of factors associated with the growth (or decline) of micro and small businesses in European economies. The growth is related to the levels of employment and value added in enterprises, as well as, ten institutional variables. We test the data for consistency of behavioural patterns in various countries and gradually remove outlying observations that can lead to erroneous conclusions when using the classic estimators; this is a quite unique approach in panel data analysis. In the first part of this paper we outline a highly robust method of estimation based on fixed effects and least trimmed squares (LTS). In its second part we apply this method on the panel data of 28 countries in 2002-2008 testing for the hypothesis that micro and small businesses in Europe use different strategies for their growth. We run a series of econometric tests where we regress employment and total net production in micro and small businesses on three economic factors: gross capital returns, labour cost gaps in small relative to large enterprises and GDP per capita. In addition, we test the role of 10 institutional factors in the growth of family businesses.

Wide range of academic studies and economic practice are showing strong correlation between GDP growth and FDI flows. Moreover, there is a number of cases when FDI inflows were positively impacting economic development. That provides grounds and needs for profound research in the area of investment determinants. The main objective of this paper is to classify FDI determinants in the EU countries. All assuming that there are differences between the two groups - old and new member states. The econometrical approach of gravity modelling was chosen as the most appropriate methodology to analyse panel data set. Panel is depicting FDI flows coming from the external nonEU investors and does not include intra EU investment flows among the member countries (firstly due to the relative insignificance of the intra-EU flows compared to the outer inflow values and secondly due to the need to answer what exactly leads non-European investor to opt for the EU country A and not B). The random effect model has proved diversity in FDI flows determinants. Study outcomes support the need for policymakers' attention in the EU investment policy harmonization, towards market equalization that would improve competiveness of the whole EU region.

In this paper we examine how business cycles in the home country affect outward flows of FDI (OFDI). We employ a panel data set of OFDI flows for a representative sample of countries from 1970 to 2011. The findings of the regression models that we have used are consistent with the hypothesis that OFDI flows behave pro-cyclically. This is the case for different country subsamples, for different business cycle specifications and for the inclusion of other control variables as well. Beyond this main conclusion, home country interest rate and exchange rates reveal a negative effect upon OFDI flows.

Foreign direct investment has become an important factor of development of economies in the last decades. However, its economic nature as well as its relationship with corruption has not yet been clarified in economic literature. Following previous theoretical research, mainly Dunning's eclectic model, this paper evaluates the econometric relationship between corruption and foreign direct investment by testing three theoretically-based hypotheses: that corruption perception indicator is a stationary variable, that the relationship between corruption and foreign direct investment stock is statistically weak and that changes in foreign direct investment stock do not Granger cause changes in corruption. The verification is based on unit root tests, panel co-integration and Granger causality models performed on data from the Transparency International, the World Bank and the Heritage Foundation and the UN Conference on Trade and Development (UNCTAD) for 94 countries for the years 1998-2007. The results show that there is no significant relationship between the two variables.

It is well documented in the literature that Malaysia has become an emerging source of outward foreign direct investment (OFDI) in the region. The drastic increase in its OFDI has raised concerns as to whether the outbound direct investment activities from the country would detract from domestic investment activities, which have been sluggish since the aftermath of the Asian Currency Crisis. Using the autoregressive distrusted lag (ARDL) modelling approach to cointegration, the findings show that there is a long-run equilibrium relationship involving the four variables, i.e. between domestic investment and its determinants such as FDI outflows, FDI inflows and domestic savings. Moreover, this study reveals that the effect on domestic investment by FDI outflows is substitutional and inelastic, while that by FDI inflows is complementary and elastic, implying that the latter can overcome the substitution effect caused by the former if the Malaysian government could formulate pragmatic policies in attracting FDI inflows.

The article is aimed at empirical investigation of the relative version of the purchasing power parity (PPP). It attempts to shed some light on the so-called 'PPP puzzle' for selected countries in the CEE region and Turkey. Because of ambiguous results in the literature, various econometrics methods are employed: univariate tests (URTs: ADF, PP, KPSS, DF-GLS), robust URTs including nonlinear URTs (Kapetanios and Sollis' and Bierens' test) and tests allowing for (multiple) structural breaks (Perron, Lee and Strazicich). The euro currency pairs (bilateral) of 10 European transition countries covering the period 1995:1-2011:1 are utilized. Our results for conventional linear (such as ADF or PP test) do not provide a crystal-clear answer, more robust URTs at least partially do, once the source of nonlinearities has been controlled for (structural changes, non-zero adjustment costs). Nonlinear tests with structural breaks provide more convincing evidence in favour of the PPP hypothesis including asymmetrical effects of exchange rate adjustments.

The aim of this work is to provide new evidence on the factors that determine the flow of FDI among transition countries. The analysis takes into consideration the period of most intense transition and post-transition (1994-2002) of 26 former socialist countries. The empirical estimates enable us to draw two main conclusions: first classical locational FDI factors maintain their role in the context of transition countries, and, second, that FDI are influenced by specific market and institutional factors. Among market variables, relatively higher labour costs surprisingly do not constitute an obstacle for foreign investment. We find that variables reflecting market stabilising institutions play a more important role than those representing market creating institutions. Although, there is a certain tolerance of foreign investors towards weak institutional environment, we demonstrate that, to attract FDI, countries should reinforce their macroeconomic stability by focusing on market stabilising institutions.

This study is a contribution to the empirical literature on the significance of productivity shocks in explaining a high saving-investment correlation, using data from a panel of 21 OECD countries over the period 1970-2003. The study looks at the distributional properties of the productivity shocks in order to test if productivity shocks can relate saving to investment. To this end, we divide the countries into three groups with respect to the distributional characteristics of productivity shocks in each country with an application of the Fuzzy-c-means (FCM) clustering technique. The results provide some support for the productivity shock argument, indicating that the saving retention coefficients are greater for the countries subject to large productivity shocks in magnitude.

This paper examines the microeconomic motivation of governments to provide tax incentives for foreign direct investment. Author applies the classical models of oligopoly to subsidy competition, endogenousing investment incentives, but leaving tax rates exogenous. According to the conventional wisdom, subsidy competition leads to overprovision of incentives. This paper suggests that, in the oligopolistic framework, supranational coordination can either decrease or increase the supply of subsidies. Further, in the setting of subsidy regulation, the host country's corporate income tax rate has an ambiguous effect on the provision of incentives.

The aim of this paper is to explore, by estimating a cross-sectional econometric model, the determining factors of foreign direct investment (FDI) inflows in developing countries over the period of 2000-2004. The study is based on a sample of cross-sectional data on 38 developing countries. We have used average value of all data for the 2000-2004 period. In the models, dependent variable is FDI. Independent variables are growth rate of per capita GDP, inflation rate, telephone main lines per 1,000 people measured in logs, labour cost per worker in manufacturing industry measured in logs, degree of openness, risk and corporate top tax rate. According to the econometric results, in the main model, growth rate of per capita, telephone main lines and degree of openness have positive sign and are statistically significant. Inflation rate and tax rate present negative sign and are statistically significant. Labour cost has positive sign and risk has negative sign. However, both are not significant.

This paper analyses the crucial factors determining the foreign direct investment (FDI) going to the privatized glass sector in the Czech Republic. In our research we felt that there was a scant evidence in Central and Eastern Europe of the determinants of foreign direct investments (FDI) at the micro level and we were aware of the endogeneity issue of FDI. The aim of this paper is to fill these gaps. The choice of the glass sector allows for an analysis of a firm's micro characteristics that attract foreign direct investors in an industrial sector, while reducing the impact of macroeconomic factors in their choice. Our econometrical analysis, using original panel data from 1990 to 2006, gives strong evidence that foreign direct investors in the glass sector in the Czech Republic have chosen larger and more profitable firms that were intensively restructured and privatized at the beginning of the transition. Our results support the relevance of the endogeneity issue in the choice of foreign direct investors in transition countries.

Foreign direct investment (FDI) is an important phenomenon in international economic relations. Generally, FDI is studied from the point of view of capital and technology transfers to the recipient countries while respecting a basic fact that profit is the main investor's interest. In this paper in Part 2, some representative examples of typical FDI models are presented, whereas Part 3 should justify the specification of a model which is formulated and applied in Part 4. Investors can be driven by the expectation of maximum profit which would be obtained by allocating FDI according to the exchange rate volatility, i.e. after a sudden large devaluation of the host country currency large FDI inflows will follow as future appreciation is expected. Large exchange rate shocks are described with the help of skewness. Negative skewness means that the appreciations occur more often. Reasoning of the model explaining FDI by mean, standard deviation and skewness of changes of exchange rate is provided. An application to two New EU Members and two ASEAN countries is presented using panel data and seemingly unrelated regression technique.

The authors are attempting to draw together existing literature on the governance of GVCs; research on host country ""spillovers"" as a consequence of MNE activity and the broader cluster and innovation literature. While cluster research had done important work in identifying and operationalizing the necessary conditions for cluster formation, it had relatively ignored the global-local linkage brought by the presence of MNEs. The ""spillover"" literature has identified in theory numerous benefits of MNE presence in host countries. There was relatively little empirical work done in CEE to discover if these benefits actually exist. Neither literature had focused on how MNEs govern their GVCs. Thus bringing these sources together presents an important opportunity for international business. The authors find that in the Slovak case the industrial clusters among the firms surveyed were not much functional. On a strategic level, there appears to be little evidence of cooperation in areas of marketing, export promotion or investment. This is especially of concern in sectors such as automotive where cooperative strategies among suppliers could offer significant benefits.

The paper discusses the prospects for capital inflows to the Czech Republic before Economic and Monetary Union accession. It reviews the potential costs and benefits of capital flows and the history of capital flows to the Czech Republic, before turning to future capital inflows. It notes that different theoretical models provide different predictions about future capital inflows. To get further insight, the paper discusses the future capital inflows from the perspective of nonresidents' supply of external savings and residents' demand for external borrowing and from the perspective of external vulnerability related to large foreign direct investment (FDI) inflow. It concludes that FDI is likely to decline somewhat in the future, but increasing sovereign borrowing needs could lead to higher inflow of portfolio capital. The final section discusses the potential for capital inflows resulting from the so-called convergence plays and concludes that there is presently little incentive for convergence-play related capital inflows.

This paper discusses the determinants of export propensity of foreign firms in the Slovenian manufacturing sector relative to domestic firms. Using panel framework we show that superior export propensity of foreign firms is significant due to the foreign ownership and that differences in fundamental operational characteristics between domestic and foreign firms significantly affect their export propensity.

In this article, we tried to estimate whether foreign direct investment in the Czech Republic, Hungary and Poland crowds in or crowds out domestic investment. We used a model of total investment that introduced, from the point of view of the recipient country, foreign direct investment as an exogenous variable. We found that for the time period 1990 - 2000 there was an evidence of crowding out effect in Poland. In Hungary we found a crowding in effect for the time period 1990 - 2000 as well as for the Czech Republic for the time period 1993 - 2000.