Investment and Economic Performance in Europe: The Role of the Investment Climate

Abstract

This dissertation investigates how investment, the investment climate, and economic integration affect the economic performance of 31 European countries. A major contribution is the development of two new composite indicators—the European Investment Attractiveness Index (IAI) and the European Union (EU) Economic Integration Index (EEI). The study conceptualizes the investment climate both as a multidimensional construct and as a framework for understanding how political, economic, and social factors interact and affect the attractiveness of a country for foreign and domestic investment. In addition, it considers how trade, financial, monetary, and value chain relationships have shaped the process of economic integration at the EU level.

The study then uses the indices to examine the impact of foreign and domestic investment on gross domestic product (GDP). The results from cross-country regression and dynamic panel data analyses reveal that both types of investment have a positive and significant impact on economic growth in Europe (although, notably, exports seem to have a larger impact than either foreign or domestic investment). Moreover, this study finds that the investment climate matters for economic performance. Attractive investment climates and higher levels of economic integration—particularly among the Central and Eastern European economies—are associated with higher per capita GDP levels and growth rates.

Finally, the dissertation examines the relationship between foreign direct investment (FDI), exports, and GDP in 11 countries in Central and Eastern Europe (CEE). While the goal is not to establish “true” causality, the results show that links between foreign investment, exports, and GDP differ significantly across these countries. While for many of them there is a reinforcing relationship between foreign investment and GDP, there does not seem to be a “causal” relationship between their exports and GDP. These findings challenge the validity of policy guidelines that emphasize—often almost exclusively—attracting foreign investment and boosting exports for development under the assumption that FDI or exports “cause” growth. Thus, policies aimed at improving the fundamentals of these economies (i.e., the investment climate) might be key in generating and sustaining economic growth.