Analysis of the Attractiveness of Foreign Direct Investments in Kosovo's Economic Development

• Author: Demir Lima
• Position: University of Prizren, Kosovo
• Pages: 32-54

Vol. 3 No. 2

June, 2019

European Journal of Economics, Law and Social Sciences

IIPCCL Publishing, Graz-Austria

ISSN 2519-1284

Acces online at www.iipccl.org

32

Analysis of the A ractiveness of Foreign Direct Investments in Kosovo’s Eco-

nomic Development

PHD Demir Lima

University of Prizren, Kosovo

Abstract

This paper studies the e ects of FDIs in a FDI Host Country. Various analysis in the paper

indicate with great certainty that FDIs are highly preferred, particularly by developing

countries, as many of the la er marked signifi cant economic growth as a result of FDI, thus

adding to local investments. Analysis of di erent levels show that developed countries

have a higher level of FDI. The main analysis as far as FDI is concerned should be based on

the form and the links of FDIs. Such analysis will allow us to be er understand how FDIs

a ect local economies, how FDIs should be addressed by state policy, through various fi scal

strategies and policies that states should undertake so that FDIs to fulfi ll their goal. Based on

the econometric analysis, the OLS and VECM models, the growing FDI fl ows have a positive

impact on the country's economic growth, specifi cally in the case of Kosovo. This research

shows that Kosovo's institutions have made e orts to improve the applicable legislation and

strengthen law enforcement in order to convey a message of security to foreign investors, of

a safe investment environment. The growth of foreign investment would be an important

source of economic growth for Kosovo, and their promotion residuals a political priority of

the country. Therefore, improving the indexes of political stability, macroeconomic stability,

and business and governance climate indicators would have an impact in the optimization of

infl ows of foreign direct investment in Kosovo.

Keywords: Investments, economy, business, management, variables.

Introduction

There is signifi cant literature for foreign direct investment in countries with economies

in transition. A er a surface analysis, our observations were focused on two main

points: the analysis of foreign direct investment determinants, including the study of

the relationship between the investment climate and FDIs, and the FDI impact analysis

in the country’s economy as well as from a macroeconomic (economic growth, and

trade) and microeconomic (restructuring and performance of enterprises) point of

view. Such analysis is intended also through this paper: initially, the factors that are

thought to a ect foreign direct investment in Kosovo will fi rst be studied, then we

will see the e ect of the la er on the economic growth rate, using models that be er

fi t with the data and variables selected for the purposes of the paper. Before moving

to the results obtained from the assessment of the model, it is important to make a

summary of the existing literature on foreign direct investment and factors that are

thought to play an important role in determining their behavior.

The methodology used in this paper consists in the use of several di erent models

and techniques applied to fi scal indicators. OLS equations have been used, in order

to investigate the factors that infl uence the growth of foreign direct investment in

European Journal of Economics, Law and Social Sciences

IIPCCL Publishing, Graz-Austria

Vol. 3 No. 2

June, 2019

ISSN 2519-1284

Acces online at www.iipccl.org

33

Kosovo. The VECM regression evaluation methodology was used to see the extent of

FDI infl uence in Kosovo’s economic growth.

1.1. Data

The analysis made in this paper used government fi scal indicators, including a period

from 2002 until end 2016. The data used are annual. The variables used are FDIs, GDP

per capita, trade openness measured as the total of exports and imports relative to

GDP, rate of infl ation, interest rate and private investments.

1.2. FDI determinants for the model

A strong reason that would motivate a company to create production facilities

abroad, rather than exporting its own products or contracting a domestic enterprise,

is the prospect of greater profi ts. The characteristics that the host country must have

to generate higher profi ts for the company and that determine its decision to invest

abroad are vast and varied, and have been thoroughly analyzed in the literature.

A signifi cant theoretical contribution to this issue has been brought by the Porter’s

“Diamond Theory” (1990), which is based on four factors defi ned as the determinants

of the country:

• Factors Conditions - production factors include natural reserves as well as those

created as a qualifi ed workforce or infrastructure;

• Demand Conditions - the nature of the country’s demand for goods and services

as well as the level of buyers;

• Related and Supporting Industries - the existence of a market of other suppliers or

industries close to that of the investment; and

• The company’s Strategy, Structure and Rivalry - the competition of local companies

and the conditions for the creation, organization and administration of the company.

These four “diamond” factors, along with the role of the government in economy and

the role of incidental events, promote or prevent the creation of competitive conditions

for companies. In general, the determining factors that infl uence the choice of the

country where multinational companies decide to invest can be classifi ed into two

categories: those related to the country of origin those related with the host country.

Variables related to the country of origin are factors that make the investment abroad

more a ractive than investments domestically, due to the current conditions of the

country. Factors related to the host country make investment in that country more

a ractive than opportunities to invest in any other country. In literature, host country-

related factors have gained more a ention. The econometric analysis of this paper

will focus on these factors.

Dunning (1993) argues that the determining motives and factors for FDI have

changed over time. FDIs towards developing countries have shi ed from market

demand to FDIs seeking yield sources (vertical). Developing countries should a ract

FDI through:

• Be er labor market conditions, which does not only mean less costly workforce,

but also productivity, fl exibility and adaptability of the workforce in the host country.