CAUSAL CONNECTION FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH: THE CASE OF BOSNIA AND HERZEGOVINA

Abstract

A large number of studies analyzing the connection between foreign direct investment and economic growth. Special attention is paid to the said association in developed countries. However, a small number of studies dealing with the said connection when it comes to Bosnia and Herzegovina (BiH), which is the main motivation for writing this paper. The aim of the research is to analyze the potential causal link between foreign direct investment (FDI) and economic growth (GDP) in the case of Bosnia and Herzegovina between 1998 and 2016. To investigate the long-term link between FDI and GDP is used Johansen co-integration test. On the other hand in order to examine the direction of that correlation in the short term, is used Granger causality test based on vector autoregression (VAR) model. Johansen co-integration test results indicate the existence of a long-term relationship between foreign direct investment and economic growth in Bosnia and Herzegovina. Granger causality test indicate a unidirectional causal impact of FDI on economic growth. The result was in line with expectations as the country is a developing country, so the FDI needed to stimulate economic growth.