This paper examines the interaction between trade and foreign direct investment (FDI) in the Central and Eastern European (CEE) countries, specifically focusing on the Czech Republic, Hungary, Poland, and the Slovak Republic. The authors note that while commercial integration of these countries within the European Union (EU) had gained momentum prior to the financial crisis, it has slowed down since then. Therefore, there is a need to identify factors that support this integration process. The study builds upon recent findings in new trade theory which suggest that FDI can influence trade intensity. However, previous studies investigating this relationship for CEE countries have presented mixed evidence and mainly focused on their integration with older EU member states. In light of this background, the objective of this research is to assess intra-integration among CEE countries. To achieve this objective, the authors employ a panel gravitational model for bilateral trade and FDI. They consider interactions between each country in their sample (Czech Republic, Hungary, Poland, and Slovak Republic) with the other three countries as well as with their three main commercial partners within the EU. The analysis covers different aspects of the trade-FDI nexus using fixed effects models, random effects models, and instrumental variable estimators over the period 2000-2013. The results indicate that outward FDI plays a significant role in sustaining commercial integration among CEE countries. On the other hand, inward FDI does not have a significant effect on integration. Additionally, there is evidence of a complementarity effect between trade and FDI across all cases examined in this study. This complementarity effect is particularly strong for historical trade partners of CEE countries. Based on these findings, policymakers in CEE countries are encouraged to promote outward FDI towards neighboring countries as a means to enhance commercial integration. Overall, this research contributes to understanding the dynamics between trade and FDI in CEE countries and provides insights into policies that can further support their integration within the EU.
Commercial integration means countries working together to trade and do business with each other. Central and Eastern European (CEE) countries have been doing this with the European Union (EU), but it has slowed down since the financial crisis. A study is being done to figure out why this is happening and what can help make it better. FDI stands for foreign direct investment, which means when a company from one country invests money in another country's businesses. This can affect how much they trade with each other, but some studies have shown different results for CEE countries. Outward FDI means when CEE countries invest money in their neighboring countries, which helps them work together more closely. Policymakers are being told to encourage this kind of investment to make commercial integration stronger."
Trade and Foreign Direct Investment in Central and Eastern European Countries
The Central and Eastern European (CEE) countries have seen a surge of commercial integration with the European Union (EU) over the past few decades. However, this process has slowed down since the financial crisis of 2008. In order to identify factors that can support further integration, researchers have been looking into the relationship between trade and foreign direct investment (FDI). This paper examines this interaction for four CEE countries: Czech Republic, Hungary, Poland, and Slovak Republic.
Background
Recent findings in new trade theory suggest that FDI can influence trade intensity. Previous studies investigating this relationship for CEE countries have presented mixed evidence and mainly focused on their integration with older EU member states. Therefore, there is a need to assess intra-integration among CEE countries as well as complementarity effects between FDI and trade across all cases examined in this study.
Objective
The objective of this research is to examine the effect of outward FDI on commercial integration among CEE countries using a panel gravitational model for bilateral trade and FDI over 2000-2013 period. Additionally, it looks at whether inward FDI has any significant effect on integration as well as complementarity effects between trade and FDI across all cases examined in this study.
Methodology
To achieve its objective, the authors employ a panel gravitational model for bilateral trade and FDI which considers interactions between each country in their sample with the other three countries as well as with their three main commercial partners within the EU. The analysis covers different aspects of the trade-FDI nexus using fixed effects models, random effects models, and instrumental variable estimators over 2000-2013 period.
Results & Findings
The results indicate that outward FDI plays a significant role in sustaining commercial integration among CEE countries while inward FDI does not have a significant effect on it. Additionally, there is evidence of a complementarity effect between trade and FDI across all cases examined in this study; particularly strong for historical trading partners of CEE countries such as Germany or Austria which are also major investors into these economies.
Implications & Policy Recommendations
Based on these findings policymakers in CEE countries are encouraged to promote outward FDI towards neighboring countries as a means to enhance commercial integration within EU markets . Overall ,this research contributes to understanding dynamics between Trade & Foreign Direct Investment (FDi)in Central & Eastern Europe(CEE)countries& provides insights into policies that can further support their Integration within EU
Inside the EU, the commercial integration of the CEE countries has gained remarkable momentum before the crisis appearance, but it has slightly slowed down afterwards. Consequently, the interest in identifying the factors supporting the commercial integration process is high. Recent findings in the new trade theory suggest that FDI influence the trade intensity but the studies approaching this relationship for the CEE countries present mixed evidence, and investigate the commercial integration of CEE countries with the old EU members. Against this background, the purpose of this paper is to assess the CEE countries' intra-integration, focusing on the Czech Republic, Hungary, Poland and the Slovak Republic. For each country we employ a panel gravitational model for the bilateral trade and FDI, considering its interactions with the other three countries in the sample on the one hand, and with the three EU main commercial partners on the other hand. We investigate different facets of the trade -- FDI nexus, resorting to a fixed effects model, a random effects model, as well as to an instrumental variable estimator, over the period 2000-2013. Our results suggest that outward FDI sustains the CEE countries' commercial integration, while inward FDI has no significant effect. In all the cases a complementarity effect between trade and FDI is documented, which is stronger for the CEE countries' historical trade partners. Consequently, these findings show that CEE countries' policymakers are interested in encouraging the outward FDI toward their neighbour countries in order to increase the commercial integration.
