THE INTERACTION OF REAL EXCHANGE RATE AND FDI SECTORAL STRUCTURE IN CROATIA

The aim of this paper is to analyze the theoretical and empirical interaction between real exchange rate and the FDI sectoral structure in Croatia. Specifically, research to date has highlighted the generally more significant impact of FDI inflows on economic growth in the manufacturing sector, due to spillover effects, than in the service sector. Previous research has shown that total FDI inflow in Croatia has a statistically insignificant effect on economic growth, while economic growth has a statistically significant effect on FDI inflow, primarily in the service sector. The assumed direction of influence is explained as follows: in the situation of liberalization of the capital flows, the FDI sectoral structure in Croatia is determined, inter alia, by movements in the real exchange rate of the domestic currency. The real exchange rate appreciation in the middle-income countries increases import-oriented consumption and thus attracts mainly FDI to the service sector with little, or even negative impact on economic growth. Based on theoretical insights, empirical analysis was conducted using VAR analysis on quarterly data from Q1/2000 - Q3/2020. Analysis confirmed the assumed relationship that appreciation of the real exchange rate had a positive and more prolonged effect on FDI inflows into the service sector than into manufacturing sector, while the impact of the FDI inflows in the service and manufacturing sector on the GDP growth rate is mostly negative.