Foreign Capital Flows as Factors of Economic Growth in Bulgaria, Czech Republic, Hungary and Poland

Abstract

While foreign investment is generally associated with economic growth, it can also pose significant risks to the economies of the recipient countries. An empirical study is carried out to test the causality between various forms of capital inflows and economic growth of four emerging market countries of Central and Eastern Europe: Bulgaria, the Czech Republic, Hungary and Poland. Using the vector autoregression framework it is found that prior to the crisis events in the world economy and euro area capital inflows, especially foreign direct investment, played significant role in boosting economic growth. However, afterwards there is no evidence of such impact and the reverse trend is observed: now economic growth is the factor driving capital inflows, again, mainly direct investments, to the countries. Also, as a result of the steady increase in value of the accumulated assets possessed by foreign investors in national economies negative effects of attracting foreign capital could be observed, which take the form of high volumes of repatriated profits, exceeding received investment and posing new threats for national economies.