Examining the Relationship Between Foreign Direct Investment and Economic Growth: Evidence from Croatia

The paper examines the relationship between foreign direct investment (FDI) and economic growth in Croatia over the period 2000-2019, based on quarterly data. The research data were retrieved from the Croatian National Bank and Eurostat databases. Two options of time series were considered: (1) logarithm of GDP growth rate and logarithm of FDI and (2) logarithm of GDP growth rate and logarithm of FDI/GDP. The conducted research employed three cointegrations tests: Engle-Granger cointegration test, Johansen cointegration test, bounds cointegration tests (ARDL model). Results of three cointegration tests indicated that there is no long-run equilibrium relationship between quarterly GDP growth rate and any of the FDI series. Lack of long-run equilibrium relationship between GDP growth rate and FDI means also that there is no Granger causality relationship between these series. In other words, FDI have no statistically significant impact on the growth rate of the GDP in Croatia for the period being investigated. This research study has important theoretical and practical implications. One of the possible explanations would be in the type of FDI inflow, mostly brownfield FDI. However, green-field FDI is the one generating more positive effects on the recipient country and countries should focus their efforts to attract this type of FDI.