Vector Error Correction Model on FDI and their Impact in the Republic of Macedonia

Abstract

The subject of this paper is the foreign direct investment (FDI) inflow in Macedonia and its impact upon the economic growth and development of the country. Its basic purpose is to analyse the interconnection of FDI with a number of economic, political and institutional variables in Macedonia. We decided to apply Vector Error Correction Model (VECM) on FDI impact upon the Macedonian economy. The FDI indicator is calculated as a function of certain fundamental economic variables (GDP growth rate, labor productivity rate, openness to trade, current account balance) as well as of Worldwide Governance Indicators (control of corruption, government effectiveness, political stability, regulatory quality and rule of law). Results obtained by the econometric model should provide relevant conclusions on the impact of the up-to-date FDI inflow upon the growth and development of the Macedonian economy.