Does Foreign Direct Investment and Trade Openness Support Economic Development? Evidence from Four European Countries

Abstract

The European Union (EU) as a political and economic union has provided many benefits to its member states through the single market and common tariffs that serves as a platform for internal trade and international trade with third-world countries. The study aimed to investigate the effect of foreign direct investment (FDI) and trade openness on economic development in four selected countries including the Czech Republic, Estonia, Lithuania, and Slovakia using panel data from 1995 to 2021. The data was obtained from the World Bank and analyzed through econometric methods such as pooled model, fixed effect model, random effect model, and the dynamic panel model. The between transformation results using the pooled ordinary least squares indicated that the Czech Republic had the highest intercept coefficient, followed by Slovakia, Lithuania, and Estonia, respectively. The panel specification test discovered that the pooled model was inadequate, and the random effect model is the most appropriate to be used. The results from the random and fixed effects models displayed that FDI and trade openness have a positive impact on economic growth in these countries. Additionally, the dynamic panel outcome proved a positive effect of FDI and trade openness. The study recommends that governments in these countries improve their business environment to attract more FDI and trade relations with other countries.