Foreign direct investment and growth in transition: panel data and time series evidence, 1991-2001


I analyse panel data and time series evidence about the effect of FDI on growth in twenty transition economies. The panel data analysis suggests that the effect of FDI on growth in the group of transition economies has been marginally negative, albeit less so for the sub-sample of candidates for membership in the EU. On the other hand, VEC analysis of the case of Hungary reveals positive cointegration between foreign capital and industrial production in that country, with a foreign capital elasticity of around 0.5. Granger-causality tests support the relevance of FDI in explaining productivity and growth, and show evidence of “FDI-led growth”, rather than of “growth-led FDI”, in the case of Hungary.