No abstract

Taking into account theory of foreign direct investment (FDI) with neoclassical and endogenous theories of economic growth, FDI has been identified as a factor which directly (capital accumulation) and indirectly (technology transfer) positively influences economic growth. However, empirical findings regarding this matter are quite diverse. Hence, the purpose of the paper is to take a critical view of the current state of empirical research regarding the impact of FDI on the recipient country's economic growth. In doing so, this research will inevitably take a view of the total global FDI inflows from 1970 until present time. The general finding is that there exists no unanimous conclusion as to the impact of capital inflow on the host country's economic growth due to a variety of reasons sometimes not properly treated within the empirical analytical models. More specifically, this impact varies from being very positive to neutral, at best, or even negative. The reasons for such ambiguous findings arise from analytical weaknesses (the way in which analytical samples are created) and the lack of better understanding of theoretical and empirical aspects of the contribution of foreign capital to the host country's economic growth (no differentiation between short-and long-term effects).

Emergence of new economic entities, through either integration or disintegration, always creates system inefficiencies resulting in temporary economic setbacks. At the macroeconomic level, this brings about slowdown in economic growth and delayed catching up with more advanced economies. In Europe, the turn of the century brought along political and economic disintegration, on one hand, and economic integration, on the other. Demise of planned economies across Eastern Europe caused serious economic turmoil due to market fragmentation. Meanwhile, creation of new economic architecture in the European Union (EU) has created additional challenges of economic restructuring. Therefore, achieving sustainable economic growth and high income has become the ultimate economic policy objective. Equity investment in form of foreign direct investment (FDI) has proven to be the right choice, because influx of fresh capital and know-how enabled strong economic growth and restructuring through increasing labor productivity and economic efficiency. Stronger competitive pressure through FDI contributed to dynamic restructuring, resembling in increasing exports and stronger integration into global economy. Yet, growth rates across countries were not always proportional to the volume of inward FDI, which indicates a certain level of underperformance for some countries. The aim of the paper is to closer investigate the FDI-growth nexus by differentiating between two types of FDI – mergers and acquisition (M&A) and greenfield investment. Thus, the analysis will take account of the characteristics of the FDI host economy, and those of the investing company, because we find it reasonable to assume that different forms of FDI incorporate different business dynamics and the time horizon of the investor’s expectations. In order to find out the effects of different forms of FDI on economic growth we apply panel data analysis with fixed effects and Prais-Winsten estimator on the sample of European reform countries whereby FDI, M&A and greenfield investment are considered the key variables. Analysis also includes a set of control variables, which combine standard neoclassical growth variables. Results indicate that, with reference to the level of innovativeness, different types of FDI indeed produce different effects on host countries’ economic growth.