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

AuthorDemir Lima
PositionUniversity of Prizren, Kosovo
Vol. 3 No. 2
June, 2019
European Journal of Economics, Law and Social Sciences
IIPCCL Publishing, Graz-Austria
ISSN 2519-1284
Acces online at
Analysis of the A ractiveness of Foreign Direct Investments in Kosovo’s Eco-
nomic Development
PHD Demir Lima
University of Prizren, Kosovo
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 signi 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 scal
strategies and policies that states should undertake so that FDIs to ful ll their goal. Based on
the econometric analysis, the OLS and VECM models, the growing FDI ows have a positive
impact on the country's economic growth, speci 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
in ows of foreign direct investment in Kosovo.
Keywords: Investments, economy, business, management, variables.
There is signi 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 rst be studied, then we
will see the e ect of the la er on the economic growth rate, using models that be er
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 scal indicators. OLS equations have been used, in order
to investigate the factors that in 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
Kosovo. The VECM regression evaluation methodology was used to see the extent of
FDI in uence in Kosovo’s economic growth.
1.1. Data
The analysis made in this paper used government 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 in 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 pro ts. The characteristics that the host country must have
to generate higher pro 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 signi cant theoretical contribution to this issue has been brought by the Porter’s
“Diamond Theory” (1990), which is based on four factors de ned as the determinants
of the country:
Factors Conditions - production factors include natural reserves as well as those
created as a quali 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 in uence the choice of the
country where multinational companies decide to invest can be classi 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, exibility and adaptability of the workforce in the host country.

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