The FDI and Economic Growth in the Western Balkans: The Role of Institutions

Abstract

This study explores the impact of foreign direct investment (FDI) and institutional quality on the economic growth of the Western Balkan economies – Albania, Bosnia and Herzegovina, Montenegro, North Macedonia, and Serbia. The conventional wisdom says that FDI plays a significant role in economic development and that institutional development may also affect this relationship. Using a panel data analysis for 20 years (2000-2019) and in contrast to this conventional wisdom, the study shows that FDI significantly negatively impacts growth within the sample countries. At the same time, the results indicate that institutional development has a significantly negative or no role on growth directly. The results depend on the proxy used for institutional development. Furthermore, when FDI and institutional development measures interact, both indicators become insignificant, including their interaction terms. This may be because the institutions within the sample countries are at low levels of development to make any significant impact on either growth or FDI-growth relationship.