The Effect of Foreign Direct Investments on Trade Balance in Southeast Europe during the Period 2000–2018

Abstract

This research analyzed the effect Foreign Direct Investments (FDI) have on the levels of exports, imports, and trade balance of six Western Balkan countries (Kosovo, Albania, North Macedonia, Bosnia and Hercegovina, and Serbia). The impact of FDI was measured using panel data for 2000–2018 for the analyzed countries, estimated using a fixed effects specification. We found that an increase in FDI as a percentage of Gross Domestic Product (GDP) had a positive and significant effect on the level of exports and imports expressed as a percentage of GDP, although the effect on imports was greater. Furthermore, when we assessed the impact of FDI on the trade balance of the analyzed countries, we found that FDI had a significant negative effect on the level of the trade balance expressed as a percentage of GDP. These results can be attributed, among other reasons, to the fact that FDI causes an increase in aggregate demand in the short run, which, in developing and middle-income countries, cannot be covered by the domestic market; thus, the demand for imports increases more rapidly than the capacity to increase exports.