O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output ConvergenceReturn

The working paper examines several variables of the Economic Freedom Index and the effect of GDP on foreign direct investment (FDI) in the 6 European Union economies (EU6) and the 6 Western Balkan economies (WB6). This study aims to explore whether these determinants affect foreign direct investments in EU6 and WB6 towards other international economies. To accomplish the stated aim, we used secondary panel data on an annual basis from the trusted databases of the Heritage Foundation and the World Bank, covering the period 2017–2023, comprising a total of 42 observations for each panel. The mathematical modeling paradigm employed is Two-Stage Least Squares (2SLS). The discoveries demonstrate that government integrity, tax burden, and business freedom statistically positively affect FDI, whereas only judicial effectiveness and trade freedom negatively affect FDI in the EU6 context. Meanwhile, in the context of WB6, the discoveries demonstrate that government integrity, business freedom, tax burden, and GDP statistically positively affect FDI, whereas judicial effectiveness and trade freedom negatively affect it. Considering the perspective of scientific contribution and creativity, the research emphasises several significant issues for the regulatory authorities that have as an ongoing agenda the encouragement of FDI entering. Policy development structures, particularly those of WB6, should establish or redesign policies that provide an attractive environment for potential investors.
Implications for Central European audience: The findings suggest that fostering government integrity, reducing tax burdens, and promoting business freedom are decisive for attracting FDI. Despite the fact that these factors positively influence FDI in both EU6 and WB6 economies, judicial effectiveness and trade freedom pose challenges, especially in the EU6 context. For policymakers, especially in WB6 countries, the research highlights the need to create a stable and investor-friendly environment. Central European regulators can draw from these insights to design or adjust policies that encourage greater foreign investment and bolster economic competitiveness in the region.

The paper examines the evolvements in the global value chain positions of the Central and Eastern European (CEE) countries. This approach enables us to reveal both economic and sector-level structural changes in the economic catching-up process. To study the structural patterns, we developed a modified smile curve framework that combines the value-added ratio and upstreamness index. Data were derived from the WIOD database from 2000 to 2014. By undergoing a significant catch-up in the last decades, CEE countries have shown considerably different patterns in their evolvements of GVC positions. Regarding the economy level, we concluded that leading economies can be described by a “U”-shaped smile curve over the period. There are two further dominant patterns that have become widespread among the CEE countries. Until 2014, the most common structure is marked by a “/” shape, which reflects an upstream-weak economy (e.g., BGR 2000; HUN 2000; LVA 2014). The second most common structure is marked by an inverted “U” shape (“^” shape), which denotes a manufacturing-heavy economy (e.g., EST 2000; POL 2000; HUN 2014; POL 2014). There is no significant difference in the added value ratio of the manufacturing sectors compared to the western countries.
Implications for Central European audience: Typically, the CEE countries are shifting towards supplier positions and sectors with less complex output, resulting in the flattening and twisting of the “U” shape. While most studies focus on a single sector or region, this study involves many sectors and many countries that provide a real global context, thus extending the GVC-related empirical studies concerning the CEER. To further facilitate the significant catching-up process, the upstream-weak economies should develop their structure in a way that less simple and specialised production processes are done at a high rate in any sector. Heavy manufacturing should elaborate market connections and develop connections to customers. It alerts that a transition is required from extensive to intensive and knowledge-based developments.