Determinants of Inward Foreign Direct Investment: Case of Macedonia

Abstract

One of the major challenges for Macedonia in the process of establishing solid basis for economic development is creating and implementing an effective policy for attracting Foreign Direct Investment (FDI). In the process of competing with other countries that already attract significant FDI and are well known among investors, Macedonia has largely liberalized its FDI policy and created various investment incentives. The main objectives of the policy are to bring foreign capital into the economy, boost economic growth and enhance regional and social development. Considering the significant costs of providing the incentives and the modest results achieved in a ten year period, this research examines the key determinants of FDI in the Macedonian economy. The idea is to examine the motives foreign investors were driven by when they decided to locate their capital in this economy. By following a quantitative research method based on cointegrating regressions with Fully Modified Ordinary Least Square (FM-OLS) and Canonical Cointegrating Regression (CCR), as well as the Vector Error Correction Model (VECM), this research shows the impact of macroeconomic determinants on FDI inward with a breakpoint regression that explains the incentives influence. The obtained results indicate towards a significant impact of macroeconomic variables on the level of FDI inflows. The findings of this research suggest that instead of investment incentives, tax holidays and financial subsidies, the government should focus on strengthening the investment environment through macroeconomic policies and therefore making it more attractive to investors.