Do Foreign Direct and Portfolio Investments Affect Long-term Economic Growth in Central and Eastern Europe?

This paper contributes to the literature which investigates the impact of foreign investment on the host country economic growth. More precisely, we test the effect of the foreign direct investment (FDI) and of the foreign portfolio investment (FPI) on the long-term economic growth in Central and Eastern European (CEE) countries, in a panel framework. For this purpose, we resort to a system-GMM approach, which corrects the endogeneity issues between growth and investment, and we employ a large set of control variables, as the interest rate, the CPI inflation, the unemployment rate, the money in circulation, the exchange rate, the primary energy consumption and the level of education. The analyzed time-span is 2005-2012 and the sample includes 13 CEE countries, namely Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, the Slovak Republic and Slovenia. We find that both direct and portfolio investments exert an influence on the long-term economic growth, when we consider equity and investment funds instruments. Our results show that incentive packages should be oriented toward both types of investments. These findings are documented both in the case of inwards and outwards investments.