Foreign Direct Investment Stock and Business Cycle Synchronization: the Case of Central European Economies

Abstract

The business cycle synchronization was widely discussed before the last economic crisis and now the interest in this topic revives. The majority of literature about business cycle synchronization evaluates the role of mutual trade and similarities among the economies, while the investment links, mainly foreign direct investment flows and stocks are very often completely ignored or at least marginalized. The paper aims to discuss and then estimate the importance of continually increasing stock of foreign direct investment in synchronization of business cycles. It focuses to selected Central European economies after economic transition and their business cycle co-movements with their most important trade partners -France, Germany and Italy. The extent of trade flows, industrial structure similarity and selected trade environment variables are used to extend the standardly employed regression formula.