Determinants and role of foreing direct investment in transition economies:with special look in FYR of Macedonia

  • Dr.Sc. Merale Fetahu-Vehapi
  • MSc. Irena Spasenoska
Keywords: FDI in Former Yugoslavian Republic of Macedonia, Determinants, role of FDI, Transition Country, Dynamic Panel Data Estimation,


The aim of this paper is to provide clear insight about the determinants and role of FDI in transition country with particular reference in FYR of Macedonia. We are using a panel dataset for twenty seven - 27 transition countries over the period 1997 to 2009. Applying static and dynamic modeling, econometrics findings have driven as to dynamic models. Inthe same empirical investigations following variables have been tested: GDP of the host and source country, unit labour cost, trade inflation, legal environment, distance, dummy variables capturing the language, common border and colonizing effect. Empirical result confirms expectation of the chosen variables as well as the positive feedback effect of past FDI onto current FDI. While the negative and significant coefficient of distance indicates that FDI is determined by gravity factors, the positive relationship between FDI stock and unit labour cost is explained through the effect of the service sector on wages. In addition, countries having higher trading shares attract more FDI. Low inflation rate as well as efficient legal system should be taken as a good sign for attracting more FDI flows since it has a positive impact on foreign investors. Dummy for English language, which indicates countries where English language is official or widely spoken in that country, have less language difficulties and more FDI flows with FYR of Macedonia.

At the same time, income level of the host country is found to be important determinant for foreign investors. Moreover, FDI role in FYR of Macedonia has been found as crucial in many aspects of country’s economic development and sustainability. Apart from accelerated growth, technical innovation and enterprise restructuring, FDI in this transition country gave considerable contribution to the financial potential improvement.


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