Cointegration analysis and VECM of FDI, employment, export and GDP in Croatia (2002-2017) with particular reference to the global crisis and poor macroeconomic governance

Abstract

Research background: The preconditions for attracting foreign investment are political stability and long-term capital investment, positively influencing the recipient country's development. During the crisis as well as in the unstable political environment, economic agents engage in speculative and risky acts for faster earnings.

Purpose of the article: The paper aims to point out the importance of foreign direct investments (FDI) and other macroeconomic variables and their relationship with particular reference to the Croatian economy in 2002-2017.

Methods: We use ADF test, development of the VECM model, testing of the stability of the VECM model, decomposition of the variance of the predictive errors of the variables, analysis of responses to unit orthogonal pulses. The vector correction auto-regression model (VECM) explores the long-term relationship between (FDI) and macroeconomic indicators in crisis time.

Findings & Value-added: Applying the VECM model, we find that employment, export, and GDP variables are exogenous in the short term. The FDI variable is statistically significant and adjusts for the long-run equilibrium. Analyzing the responses to unit shocks, we conclude there is weak feedback of the observed variables and a weak effect of the observed variables in the Croatian economy. The FDI variable does not affect GDP, employment, and exports in Croatia due to poor macroeconomic management, corruption, regional development, inefficiency, and inefficient foreign direct investment structure.

Keywords

FDI, VECM model, macroeconomic variables, long-term equilibrium, crisis

References

1. Alfaroy, L., & Chen, M. X. (2010). Surviving the global financial crisis: foreign direct investment and establishment performance. Harvard Business School BGIE Unit Working Paper, 10-110. DOI: https://doi.org/10.2139/ssrn.1623831
   View in Google Scholar
2. Auer, S. (2019). Monetary policy shocks and foreign investment income: Evidence from a large Bayesian VAR. Journal of International Money and Finance, 93, 142-166. doi: 10.1016/j.jimonfin.2018.12.013 DOI: https://doi.org/10.1016/j.jimonfin.2018.12.013
   View in Google Scholar
3. Babić, A., Pufnik, A., & Stučka, T. (2001). Theory and reality of foreign direct investments in the world and countries in transition with focus on. Croatian National Bank Publication, P-9.
   View in Google Scholar
4. Bahovec, V., & Erjavec, N. (2009). Introduction to econometric analysis. Zagreb: Element.
   View in Google Scholar
5. Belullo, A. (2009). Impact of foreign direct investments on GDP, employment and export in (VAR i VECM). Faculty of Economics and Tourism "Dr. Mijo Mirković" Working paper.
   View in Google Scholar
6. Belullo, A. (2011). Introduction to econometrics. Pula: Juraj Dobrila University of Pula, Faculty of economics and tourism "Dr. Mijo Mirković".
   View in Google Scholar
7. Bilas, V., & Franc, S. (2006). The role of foreign direct investments and the method of incentives. Series of Emerging Articles, Faculty of Economics and Business, University of Zagreb, 13. Retrieved from http://hrcak.srce.hr/file/202205.
   View in Google Scholar
8. Bilas, V. (2006). Attracting foreign direct investments and competition across countries, Faculty of Economics and Business Proceedings, University of Zagreb, 4(1), 87-100.
   View in Google Scholar
9. Cho, Y., Daim, T. U., & Dabic, M. (2017). Investigating the effects of foreign direct investment (FDI) on Croatian business. Journal of High Technology Management Research, 28, 208-220. doi: 10.1016/j.hitech.2017.10.005. DOI: https://doi.org/10.1016/j.hitech.2017.10.005
   View in Google Scholar
10. Desbordes, R., & Wei, S. J. (2017). The effects of financial development on foreign direct investment. Journal of Development Economics, 127, 153-168. doi: 10.1016/j.jdeveco.2017.02.008. DOI: https://doi.org/10.1016/j.jdeveco.2017.02.008
    View in Google Scholar
11. Derado, D. (2002). Foreign Direct Investments in Croatia, Economic Research - Ekonomska istraživanja, 15(2), 69-81.
    View in Google Scholar
12. Derado, D. (2013). Determinants of FDI in transition countries and estimation of the potential level of Croatian FDI. Financial Theory and Practice, 37(3), 227-258. doi: 10.3326/fintp.37.3.1. DOI: https://doi.org/10.3326/fintp.37.3.1
    View in Google Scholar
13. Dickey, D., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49, 1057-1072. DOI: https://doi.org/10.2307/1912517
    View in Google Scholar
14. Do., D., & Rousse., W. (2018). Foreign capital flows, credit spreads, and the business cycle. Journal of International Financial Markets, Institutions & Money, 57(C), 59-79. doi: 10.1016/j.intfin.2018.06.001. DOI: https://doi.org/10.1016/j.intfin.2018.06.001
    View in Google Scholar
15. Dorneana, A., Işan, V., & Oanea, D. C. (2012). Emerging markets queries in finance and business the impact of the recent global crisis on foreign direct investment. Evidence from Central and Eastern European Countries Procedia Economics and Finance, 3, 1012-1017. DOI: https://doi.org/10.1016/S2212-5671(12)00266-3
    View in Google Scholar
16. Dritsaki, C., & Stiakakis, E. (2014). Foreign direct investments, exports, and economic growth in Croatia: A time series analysis. Procedia Economics and Finance, 14, 181-190. doi: 10.1016/S2212-5671(14)00701-1. DOI: https://doi.org/10.1016/S2212-5671(14)00701-1
    View in Google Scholar
17. Dunning, J. H. (1977). Trade, location of economic activity and the MNE: a search for an eclectic approach. In The international allocation of economic activity. London: Palgrave Macmillan. DOI: https://doi.org/10.1007/978-1-349-03196-2_38
    View in Google Scholar
18. Economou, F. (2019). Economic freedom and asymmetric crisis effects on FDI inflows: The case of four South European economies. Research in International Business and Finance, 49(C), 114-126. doi: 10.1016/j.ribaf.2019.02.011. DOI: https://doi.org/10.1016/j.ribaf.2019.02.011
    View in Google Scholar
19. Franc, S. (2013). Development cycles of foreign direct net investments in EU member countries. Ekonomski vjesnik: Review of Contemporary Entrepreneurship, Business, and Economic Issues, 26(1), 23-37.
    View in Google Scholar
20. Franc-Dąbrowska, J., Mądra-Sawicka, M., & Ulrichs, M. (2019). Determinants of dividend payout decisions ? the case of publicly quoted food industry enterprises operating in emerging markets. Economic Research-Ekonomska Istraživanja, 33(1), 1108-1129. doi: 10.1080/1331677X.2019.1631201. DOI: https://doi.org/10.1080/1331677X.2019.1631201
    View in Google Scholar
21. Fuller, W. A. (1996). Introduction to statistical time series. New York: John Wiley. DOI: https://doi.org/10.1002/9780470316917
    View in Google Scholar
22. Hannan, E. J., & Quinn, B. G. (1979). The determination of the order of an autoregression. Journal of the Royal Statistical Society: Series B (methodological), 41(2), 190-195. DOI: https://doi.org/10.1111/j.2517-6161.1979.tb01072.x
    View in Google Scholar
23. Hsieh, H-Ch., Boarelli, S., & Vu, T. H. Ch. (2019). The effects of economic policy uncertainty on outward foreign direct investment. International Review of Economics and Finance, 64, 377-392. doi: 10.1016/j.iref.2019.08.004. DOI: https://doi.org/10.1016/j.iref.2019.08.004
    View in Google Scholar
24. Hunady, J., & Orviska, M. (2014). Determinants of foreign direct investment in EU countries ? do corporate taxes really matter. Procedia Economics and Finance, 12, 243-250. doi: 10.1016/S2212-5671(14)00341-4. DOI: https://doi.org/10.1016/S2212-5671(14)00341-4
    View in Google Scholar
25. Jacimovic, D., Dragutinović Mitrović, R., Bjelić, P., Tianping, K., & Rajkovic, M. (2018). The role of Chinese investments in the bilateral exports of new E.U. member states and Western Balkan countries. Economic Research-Ekonomska Istraživanja, 31(1), 1185-1197. doi: 10.1080/1331677X.2018.1456357. DOI: https://doi.org/10.1080/1331677X.2018.1456357
    View in Google Scholar
26. Jadhav, P. (2012). Determinants of foreign direct investment in BRICS economies: Analysis of economic, institutional and political factor. Procedia - Social and Behavioral Sciences, 37, 5-4. doi: 10.1016/j.sbspro.2012.03.270. DOI: https://doi.org/10.1016/j.sbspro.2012.03.270
    View in Google Scholar
27. Jakšić, S., Erjavec, N., & Cota, B. (2019). The role of foreign direct investment and labor productivity in explaining croatian regional export dynamics. Central European Journal of Operations Research, 27, 835?849. doi: 10.1007/s10100-018-0583-2. DOI: https://doi.org/10.1007/s10100-018-0583-2
    View in Google Scholar
28. Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2-3), 231?254. DOI: https://doi.org/10.1016/0165-1889(88)90041-3
    View in Google Scholar
29. Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551?1580. DOI: https://doi.org/10.2307/2938278
    View in Google Scholar
30. Jovančević, R. (2002). Dimension of foreign direct investments in contemporary world. Economic Review, 53(5-6), 450-469,
    View in Google Scholar
31. Kersan-Škabić, I. (2017). Modern trends in international economics. Pula: Juraj Dobrila University of Pula.
    View in Google Scholar
32. Kersan-Škabić, I. (2019). The drivers of global value chain (GVC) participation in EU member states. Economic Research-Ekonomska Istraživanja, 32(1), 1204-1218, doi:: 10.1080/1331677X.2019.1629978. DOI: https://doi.org/10.1080/1331677X.2019.1629978
    View in Google Scholar
33. Klapić, M., & Nuhanović, A. (2011). Level, dynamics and effects of foreign investments in highly developed countries of the world. Transition, 13(27), 60-73.
    View in Google Scholar
34. Kokores, I. T., Kottaridi, C., & Pantelidis, P. (2017). Intra Eurozone foreign direct investment and deflation. International Advances in Economic Research, 23, 217?229. doi: 10.1007/s11294-017-9629-9. DOI: https://doi.org/10.1007/s11294-017-9629-9
    View in Google Scholar
35. Lovrinčević, Ž., Mikulić, D. & Marić, Z. (2004). Investment efficiency and FDI ? old story, new circumstances. Economic Review, 55(1-2), 3-43.
    View in Google Scholar
36. Ministry of the Economy, Investment Promotion Strategy for the Republic of Croatia for the Period 2014-2020, May 2014.
    View in Google Scholar
37. Nandi, S. (2012). Comparative analysis of foreign direct investment trends in emerging economies. Procedia - Social and Behavioral Sciences, 37, 230-240. doi: 10.1016/j.sbspro.2012.03.289. DOI: https://doi.org/10.1016/j.sbspro.2012.03.289
    View in Google Scholar
38. Paun, D. (2019). Tax competition and factors influencing the gross domestic product and foreign direct investments of CEE countries. Economic Research-Ekonomska Istraživanja, 32(1), 876-893. doi: 10.1080/1331677X.2019.1585 896. DOI: https://doi.org/10.1080/1331677X.2019.1585896
    View in Google Scholar
39. Pavlović, D. (2008). Foreign direct investments in international trade. Zagreb: Golden Marketing.
    View in Google Scholar
40. Poulsen, L. S., & Hufbauer, G. C. (2013). Foreign direct investment in times of crisis. Transnational Corporations, 20(1), 19-37. DOI: https://doi.org/10.18356/138883a0-en
    View in Google Scholar
41. Romer, P. (1993). Idea gaps and object gaps in economic development. Journal of Monetary Economics, 32, 543-573. DOI: https://doi.org/10.1016/0304-3932(93)90029-F
    View in Google Scholar
42. Sisek, B. (2005). Foreign direct investment in Croatia ? causes of failure. Faculty of Economics and Business Proceedings, University of Zagreb, 3(1), 89-108.
    View in Google Scholar
43. Škare, M., Sinković, D. & Družeta, R. P. (2014.). New economnics as a science economics. In V. Cini, D. Borozan & I. Ferenčak (Eds.). 5th interfaculty scientific conference Competitiveness, economic growth and wealth, University J.J. Strossmayer Osijek, Faculty of Economics Osijek.
    View in Google Scholar
44. Škare, M. (2014). Mjerenje međuzavisnosti poslovnih ciklusa i ekonomskoga rasta u Hrvatskoj primjenom spektralne analize. EFZG Occasional Publications (Department of Macroeconomics), 1(1), 53-76.
    View in Google Scholar
45. Škare, M. (2001). The Factors of Labour Demand and the Nature of Unemployment in Croatia. Revija za socijalnu politiku, 8(1), 19-35. DOI: https://doi.org/10.3935/rsp.v8i1.227
    View in Google Scholar
46. Škuflić, L., & Botrić, V. (2009). Foreign direct investments in Croatia: regional perspective. Economic research-Ekonomska Istraživanja, 22(3), 9-29.
    View in Google Scholar
47. Šohinger, J., & Harrison, G. (2004). The implications of foreign direct investment for development in transition countries: challenges for the Croatian Economy. Eastern European Economics, 42(1), 56-74. DOI: https://doi.org/10.1080/00128775.2004.11041069
    View in Google Scholar
48. Šohinger, J., Galinec, D., & Škudar, A. (2006). Is foreign direct investment helping Croatian competitiveness. Greenwich University Press.
    View in Google Scholar
49. Ucal, M., Özcan, K. M., Bilgin, M. H., & Mungo, J. (2010). Relationship between financial crisis and foreign direct investment in developing countries using semiparametric regression approach. Journal of Business Economics and Management, 11(1), 20-33. DOI: https://doi.org/10.3846/jbem.2010.02
    View in Google Scholar
50. Van Cauwenberge, A., Vancauteren, M., Braekers R., & Vandemaele S. (2019). International trade, foreign direct investments, and firms' systemic risk: evidence from the Netherlands. Economic Modelling, 81(C), 361?386. doi: 10.1016/j.econmod.2019.07.001. DOI: https://doi.org/10.1016/j.econmod.2019.07.001
    View in Google Scholar
51. Vukšić, G. (2005). Impact of foreign direct investment on Croatian manufacturing exports. Financial Theory and Practice, 29(2), 131-158.
    View in Google Scholar
52. Yavas, B. F., & Malladi, R. K. (2020). Foreign direct investment and financial markets influences: results from the United States. North American Journal of Economics and Finance, 53, 101182. doi:10.1016/j.najef.2020.101182. DOI: https://doi.org/10.1016/j.najef.2020.101182
    View in Google Scholar
53. https://www.statista.com.
    View in Google Scholar
54. https://www.ceicdata.com/en/indicator/croatia/foreign-direct-investment.
    View in Google Scholar