The Role of FDI in Increasing Employment for South-East European Countries

Abstract

According to neoclassical and liberal economic doctrines, foreign direct investments represent the best chance for developing countries to accelerate their economic growth. The attraction of foreign capital would not mean just the import of capital but the absorption of new working methods, manners, traditions, and technology too. Famous authors such as Moose (Foreign direct investment: theory, evidence, and practice. Palgrave, 2001) suggested that FDI plays a very important role in transforming countries, especially post-communist ones. Foreign investments change the economic structure of the host country and increase international trade exchange, orienting national products in each country toward comparative advantages or toward those products and services where each country is specialized.

Lall and Streeten (Foreign investment, transnational and developing countries. Macmillan, 1977) add that FDI enhances the wellness of the host country, under certain optimal features, creating the conditions in order to maximize the profits of international companies, investing in local specialized companies, and using a comparative advantage of the country. Beyond the theoretical thought, it should be clarified that FDI does not always have a positive effect on economic growth and even more questionable is their role in the employment growth, as regards the developing countries.

In the case of Eastern Europe countries, after the fall of Communism, numerous privatizations of former state-owned enterprises led to a reduction of jobs in favor of creating profit for the new private owners. In other cases those privatization processes ended with the bankruptcy of enterprises. Foreign direct investment in other cases intervened in open sectors inducing a higher level of competition but without creating new jobs or higher levels of GDP. High competition in certain sectors did not bring a higher production or more employment but higher uncertainty for the workplace as a result of a more pronounced competition. Last but not least, Jones affirms that FDI could cause negative externalities in other sectors of economy in the case connected to the environmental pollution and health damages. New investments can provoke contamination in water sources and in the air, compromising economic and health activities relating to them.

In this paper will be analyzed the effects of Foreign Direct Investment in countries of South-East Europe and will be shown whether FDI brought an economic growth and increased employment at the aggregate level during the years 2001–2014 or if for this region too, are confirmed concerns over collateral effects that FDI can have on the economy. Through the program e-views will analyze time series regressions between FDI, economic growth, and employment growth. In this paper it will be clear that in South-East Europe, FDI generally played a positive role not only in economic growth but also on employment growth, especially in those sectors where these investments were more concentrated. Finally, after having appreciated the effects of FDI, we will set up a recipe on how FDI may be channeled in order to give greater effects on GDP and employment.