Cobb–Douglas production function on FDI in Southeast Europe

Journal of Economic Structures, Apr 2016

In this research, we focus on effects of foreign direct investments in Southeast European economies. Using World Bank Microdata Library and specifically Enterprise Surveys, we take a sample of six countries. The model is based on firm-level data of a representative sample of economy’s private sectors for Albania, Bosnia and Herzegovina, Croatia, Macedonia, Serbia and Slovenia. What we are closely examining are the effects of foreign direct investments on the development of domestic firms and the overall economy. Foreign direct investment is usually defined as dominant or controlling ownership of a company in one country, by an entity based in another country. Transition economies undergo a set of structural transformations intended to develop market-based institutions through economic liberalization, where prices are set by market forces. Hence, foreign direct investments remain main concern as major source of capital utilized toward enterprise restructuring. This research is built on Cobb–Douglas production function where data are analyzed with econometric models, which as employed in this study examines the interrelationships between output and set of variables that influence foreign direct investments arrangements. Additionally, according to the results, estimates are specified on the ways foreign direct investments mold the economy.

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Cobb–Douglas production function on FDI in Southeast Europe

Apostolov Economic Structures Cobb-Douglas production function on FDI in Southeast Europe Mico Apostolov 0 1 0 Albania , Bosnia and Herzegovina, Croatia, Macedonia , Serbia and Slovenia 1 JEL Classification: D01 , F21, G11, G31, L33, O11, P31 In this research, we focus on effects of foreign direct investments in Southeast European economies. Using World Bank Microdata Library and specifically Enterprise Surveys, we take a sample of six countries. The model is based on firm-level data of a representative sample of economy's private sectors for Albania, Bosnia and Herzegovina, Croatia, Macedonia, Serbia and Slovenia. What we are closely examining are the effects of foreign direct investments on the development of domestic firms and the overall economy. Foreign direct investment is usually defined as dominant or controlling ownership of a company in one country, by an entity based in another country. Transition economies undergo a set of structural transformations intended to develop market-based institutions through economic liberalization, where prices are set by market forces. Hence, foreign direct investments remain main concern as major source of capital utilized toward enterprise restructuring. This research is built on Cobb-Douglas production function where data are analyzed with econometric models, which as employed in this study examines the interrelationships between output and set of variables that influence foreign direct investments arrangements. Additionally, according to the results, estimates are specified on the ways foreign direct investments mold the economy. FDI effects; Output; Southeast Europe 1 Background The study is to be focused on probing effects of foreign direct investments in Southeast Europe economies. Hence, six countries have been taken as sample for this research: The basic hypothesis is that output depends on set of variables and is possibly driven by foreign ownership influx. In order to test this hypothesis, it is used standard growth accounting approach, i.e., Cobb–Douglas production function, and more specifically two different ways are employed to see the effects. The first path is a regression used to see outcomes for every specific country separately. On the other hand, the second course of research examines the relationship of output to set of variables for the whole region of Southeast Europe. The academic significance of the topic is in determining the factors that influence foreign direct investments, as well as the way FDI spillovers contribute toward the development of Southeast Europe transition economies. In Sects. 2 and 3, we give the theoretical and literature framework and possible impact on the growth of the host country. Further, in Sect.  4 we form the analytical framework comprised of two main elements: (a) sample selection and data and (b) model and econometrics. Section 5 encompasses the results and effects, where we give simulations and answers to the research question. Finally, Sect. 5 tries to raise certain academic discussions and concludes. 2 Theoretical and literature framework There are many studies that try to explain why multinational enterprises prefer foreign direct investment as instrument of setting up operations overseas, opposed to export or license. The most compelling arguments that come close to explication are those that relate the coexistence of proprietary knowledge and market failures in protecting that knowledge, where the firm through internalization of transactions guards its advances in technology, management know-how and brand (Caves 2007; Markusen 1995) . Further, there is well-developed literature that examines the benefits of foreign direct investment on host-country economy. Transfer of technology to domestic companies, knowledge transfer, increased labor force productivity and decreased unemployment, and increased exports due to rectified competitive characteristics of companies can be counted as most noteworthy changes in a domestic economy due to increased foreign direct investment presence. The financial aspects on domestic balance of payments that fallow foreign direct investment include financing external current account deficits—a result of decreased capital spending and increased exports, non-debt-creating upshots, as well as increased income on behalf of overall capital and product transactions and, finally, increased economic activity. When there is foreign direct investment in greenfield or brownfield plant, the firm that invests has anticipation of achieving a higher rate of return. Such expectations usually are a result of technological advantage and international foothold gained in global operations, strengthening the competitive advantage over the competition in sector or market. On the other hand, a domestic firm can have benefit from external influx of investment only in the case of indirect technology transfer in an environment where the international entrant is not willing voluntarily to gi (...truncated)


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Mico Apostolov. Cobb–Douglas production function on FDI in Southeast Europe, Journal of Economic Structures, 2016, pp. 10, Volume 5, Issue 1, DOI: 10.1186/s40008-016-0043-x