The Effect of China’s Outward Foreign Direct Investment on the Economic Growth of the Visegrád Group [védés előtt]

The relationship between foreign direct investment and economic growth has been widely debated in the economic literature, but the results have been inconsistent and vary between the short and long run. As such, this study examines and provides additional quantitative evidence on the effect of China’s outward foreign direct investment (OFDI) on the economic growth of the Visegrád Group (V4), namely, the Czech Republic, Hungary, Poland, and Slovakia, both in short and long run, using annual data from 2004 to 2020. Various econometric models are employed to ensure the robustness of the findings, including panel-based Feasible Generalized Least Squares (FGLS), Pooled Ordinary Least Squares (POLS), Fixed Effects (FE), and Random Effects (RE); Markov-Switching Dynamic Regression (MSDR); Principal Component Analysis (PCA) and Cross-Sectional Autoregressive Distributed Lag model (CS ARDL). The novelty of this research is the acknowledgement of productive capacities as a moderating factor between China’s OFDI and economic growth of the V4 countries. The results show that FDI stimulates economic growth in both short and long run. Productive capacities index, as a moderating factor, is significant in explaining the relationship between China’s foreign direct investment and economic growth of the V4. Other macroeconomic factors also play an important role in explaining economic growth in V4. Long-run economic growth is driven by total factor productivity and trade openness, although trade openness is not significant in the short-run. MSDR model divides the V4’s economic growth into high growth state (state 1) and low growth state (state 2). This study has found that FDI can enhance economic growth of each V4 country in both state 1 and state 2, except in Czech Republic FDI is insignificant in state 1. MSDR model also estimates the transition probability of each country from one state to another and provides the expected duration of remaining in each state. The results reveal that the transition probability of remaining in state 2 is high and persistent in Czech Republic, Poland, and Slovakia, while it’s low in Hungary. In line with the transition probability, the expected duration of remaining in state 2 is longer than in state 1 in Czech Republic, Poland, and Slovakia, while it’s the other way around for Hungary. PCA model groups three components and the “the dimension of China’s OFDI” [pc1] is the main variable of interest and it consists of China’s OFDI, total factor productivity, fixed capital formation, trade openness, population growth, and producer price inflation. Quantile regression shows that pc1 has a positive and highly significant effect when real GDP growth is at its .50 and .75 percentile, and moderately significant at its .25 percentile. The findings of this study have significant implications for policymakers, investors and academic researchers. The results emphasise the importance of decision-making for government, investors, and investees to understand relationship between foreign direct investment and economic growth thoroughly. Therefore, policy recommendations are developed for V4 countries