AD ALTA
JOURNAL OF INTERDISCIPLINARY RESEARCH
FOREIGN DIRECT INVESTMENTS AND THEIR IMPACT ON DEVELOPMENT OF ECONOMIC
INDICATORS: EVIDENCE FROM SLOVAK REPUBLIC
a
MICHAL FABUS
School of Economics and Management of Public Administration
in Bratislava, Slovak republic, Department of Economics and
Finance, Furdekova 16, 851 04 Bratislava, Slovak republic
email:
a
michal.fabus@vsemvs.sk
The paper is the output of an international scientific project IGA no. 2/2018 - M
„Problems and Suggestions - Comparison of Commercial Environment between China
- Slovakia and Facilitation of Trade and Investment”. (Funder: Internal Grant Agency
VSEMvs, i.e. School of Economics and Management in Public Administration
Abstract: The issues of foreign direct investment and their impact on the country's
economy is still a much-discussed topic. On the example of the Slovak Republic, we
will try to analyze the influence of FDI inflow on selected economic indicators. In
addition to the FDI inflow, we will consider the unemployment rate, the average
nominal wage, and GDP in Slovakia for selected indicators. Using the Pearson
correlation coefficient and regression analysis using linear regression, we will analyze
the significance of the interrelationships between variables based on data for 15 years
(from 2003 to 2017).
Keywords: foreign direct investments, economic growth, average wage,
unemployment, Pearson correlation coefficient, Slovak republic.
1 Introduction
There are several opinions and definitions of foreign direct
investment (FDI) in the literature. Foreign direct investment
refers to the purchase of foreign assets for control purposes.
Under control, we understand the management of the company
whose assets have been purchased (Dudas, 2010).
Foreign direct investment can also be defined as the longer-term
interest of a resident entity in one country by a company located
in another country. Longer-term interest is the existence of
longer-term relationships and the significant influence of the
investor on the management of the company. Direct investment
represents both initial investment and all subsequent capital
flows within companies. These features distinguish FDI from
portfolio investment.
Portfolio investments are investments in a company where the
investor does not interfere with the management of the company,
but his interest is merely the appreciation of his share. In
determining the existence of a direct investment relationship, the
10% share capital or enterprise voting power criterion is used in
accordance with international standards (Dudas, 2010).
In addition to the above definitions, FDI is seen as an effective
tool needed to boost the economy's performance. FDI inflows
into countries have a positive impact on GDP developments,
unemployment rates, labor productivity, the contribution of new
technologies and production processes, know-how and increased
domestic human capital skills.
The Slovak Republic is booming in investment. In the 1990s,
developments in FDI area was lagging. In particular, the
following political developments beginning 2000s, were quite
rapid and thus the investment started to develop the economy of
the country rapidly, making Slovakia one of the most developing
countries in the euro area over the past ten years.
This paper aims to analyze the impact of FDI on the country's
economic indicators. Based on the Pearson correlation
coefficient r we first determined the intensity of the relationship,
respectively. the strength of statistical dependence between FDI
and variables - unemployment rate, average nominal wage and
GDP in Slovakia. In the second step, we performed a regression
analysis using linear regression, which tested the quality of the
relationship between FDI and variables unemployment rate,
average nominal wage and GDP in Slovakia. As for the time
series of all 4 variables, we used the National Bank and the
Statistical Office of Slovak republic data. The test period was
2003 to 2017, indicating that the number of variables for
statistical testing was 15 altogether.
2 Literature review
In the past, goods exchange played a major role in the
development of business activities, with changes in capital
movements later. The international movement of capital has
reached a rapid pace, globalization has facilitated this process of
growth and expansion. It has brought simplification and
acceleration of processes. International capital flows into
different economies in different economies, including foreign
direct investment (FDI). FDI plays a very important role in
international business - it represents international capital
movements and external sources of economic and economic
growth of the economy (Dudas, 2010). Being also an additional
source of funding FDI can be called the up-to-date driver for
development (Kaminska, 2016). This is a very complex process,
as there are different political, legal, economic, and cultural
environments in each country. Historically, we can say that the
first mention of FDI goes back to the end of the 1950s. In the
1970s and 1980s, the boom began to grow. Today, they are part
of the economy of countries where the FDI indicator is one of
the main indicators of the national economy.
FDI is defined as a long-term investment of a foreign direct
investor in an enterprise resident in another country's economy,
not in a foreign investor's home country. The relationship of
foreign direct investment consists of a parent company and
foreign affiliates, which together form a multinational
corporation (Fabus, 2015). Under the constant share we
understand the existence of the long-term nature of the direct
investor and the direct investment enterprise, its significant
contribution to the management of the business. The criterion
that is in line with international standards to determine the
existence of a direct investment is a 10% share of the core
capital or voting rights in an enterprise.
In the theory of FDI motivation of multinational corporations,
Dunning creatively divides FDI into resource motive, efficiency
seeking, market seeking and strategic asset seeking four motives
(Dunning, 2001), which becomes the basic paradigm for
studying OFDI motivation and behavior.
FDI can have a significant impact on regional development. On
the one hand, FDI tends to focus on advanced regions and thus
increase regional disparities, on the other hand, it can be a
significant exogenous impulse for the development of regions.
FDI inflows alone do not provide for any equalization of
regional disparities, but for developing countries it is one of the
basic instruments for achieving economic growth. It is economic
growth that is one of the basic conditions for improving equality
and convergence of regional disparities (Blanc-Brude, et.al.
2014).
The issue of investment attractiveness determinants is currently a
topic often dealt with in many publications of both Slovak and
foreign authors. The significance of factors affecting investment
attractiveness is dealt with for instance by A. Bevan (2000,
2004), S. Estrin (2000, 2004) and K. Meyer (2004), who divide
these factors into two basic groups (political and economic
factors) and differentiate between factors affecting host and
domestic economies. S. Brakman and H. Garretsen (2008) seek
the main reasons leading companies to foreign investments as
well as ways how a foreign market can be entered. Other authors
(e.g. Dudas 2010; Fabus 2017, 2018; Csabay, 2018) deal with
individual factors and their impact on economic development,
respectively economic growth, and motivation of investors,
economic and political conditions created in a host country. If a
foreign investor enters the market, it contributes to the formation
of the host country's gross domestic product by generating a
profit from which to pay taxes. Theoretical background of
investment attractiveness and the theories of creation,
respectively motivation of FDI creation and movement were
based on leading foreign authors. The best known is J. H.
Dunning (1979, 2001) and his eclectic theory based on three
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