DETERMINANTS OF FDI IN CEE COUNTRIES: A PANEL DATA ANALYSIS

The aim of this paper is to identify some of the major economic and institutional determinants of foreign direct investments (FDI) inflows to five CEE countries over the period of 1996-2019 by utilizing panel co integration analysis. The five countries included in this study are Bulgaria, Czech Republic, Hungary, Poland and Romania. The Pedroni and Kao co integration test results show the presence of long-run relationships between FDI and financial developments, economic growth, consumer price index (CPI), trade openness, labour cost, and real effective exchange rate (REER). Using a Fully Modified Ordinary Least Squares (FMOLS) and the vector error correction model (VECM), the real GDP per capita, labour cost, and trade openness have a positive and significant impact on FDI inflows. On the other hand, developing countries don’t need better developed financial markets in the FDI-growth nexus. The empirical analysis on CEEs data reveals that the compensation of employees as a share of GDP, used as a proxy for labour cost, has a positive effect on FDI and is statistically significant. This implies that higher wage levels increase FDI inflows into transition economies, one of the positive spillovers of foreign companies in home countries where they operate, by offering higher wages for more qualified labour force who can adopt new and advanced technology easily.