The FDI and Economic Growth in the Western Balkans: The Role of Institutions

This study explores the impact of the foreign direct investment (FDI) and institutional quality on economic growth of the Western Balkan economies – Albania, Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia. The conventional wisdom says that FDI plays a significant role in economic development and that institutional development may affect this relationship as well. Using a panel data analysis for a period of 20 years (2000-2019) and in contrast to this conventional wisdom, the study shows that FDI has a significantly negative impact on growth within the sample countries. At the same time, the results indicate that institutional development has significantly negative or no role on growth directly. The results depend on the proxy used for institutional development. Furthermore, when FDI and institutional development measures are interacted, both indicators including their interaction terms become primarily insignificant. This may be due to the fact that the institutions within the sample countries are at low levels of development to make any significant impact on either growth or FDI-growth relationship.