How FDI Facilitates the Globalization Process and Stimulates Economic Growth in CEE

By Kornecki, Lucyna; Rhoades, Dawna | Journal of International Business Research, January 2007 | Go to article overview

How FDI Facilitates the Globalization Process and Stimulates Economic Growth in CEE


Kornecki, Lucyna, Rhoades, Dawna, Journal of International Business Research


ABSTRACT

The collapse of communism and the advanced Economic Integration of Europe shaped the global development in the twenty-first century. This study reviews the experience of Central and Eastern European (CEE) countries in integrating into the global market and suggests a link between foreign direct investment (FDI) stock and economic growth.

The first section defines the globalization process and discusses World FDI inflows. The second section analyzes FDI inflow in to CEE countries, the third examines FDI stock as a percentage of the gross domestic product (GDP). The fourth section provides an overview of the basic economic growth trends in CEE and shows the association between FDI stock and economic growth in CEE using correlation coefficient. The fifth one includes propositions for the future research and concludes that this study can be extended to verify the association between FDI stock and the economic growth of CEE economies using the growth model based on the production function.

This paper examines the role of the FDI in facilitating advancing globalization process in the CEE economies and explores the relationship between increasing FDI stock and economic growth.

INTRODUCTION

There is no doubt that the world is moving toward a single global economy, where national economies are becoming more globally integrated and interconnected. Globalization process includes social, cultural, political and economic aspects. Economic globalization is based on specialization and international exchange, which lead to increasing interdependence among countries. These two practices increase the international trade of goods and services, the movement of labor and capital and foster the growth of travel and communications.

Proponents of globalization believe that it boosts productivity and living standards around the world. In current literature, researchers evaluate the impact of a few components of globalization including exports, FDI inflows, international financial flows and economic integration.

This paper focuses on FDI as an important factor facilitating the globalization process of CEE economies and stimulating economic growth in this region. High shares of FDI stocks as a percentage of the GDP in the analyzed countries indicate that foreign capital plays a vital role in CEE economies and acts as an indicator of advancing globalization processes in CEE countries.

Foreign capital has fulfilled a very important role in the process of privatization and restructuring of the Central and Easter European (CEE) economies. The FDI has become today an essential factor stimulating sustained economic growth, expansion of capital stock, increase in productivity, employment, innovation and technology transfer.

DEFINING GLOBALIZATION

Globalization is a dynamic process of liberalization, openness, and international integration across a wide range of markets, from labor to goods and from services to capital and technology. Globalization is based upon the freedom to trade with the rest of the world and to capitalize on each country's comparative advantage, the freedom to invest where returns on capital are greatest (Dehesa, 2006). The concept of globalization includes the movement of goods and services in the world economy, movement of resources, FDI, multinational corporation and international movements of financial capital. (Sawyer, 2006). Globalization signifies a process of intensification of economic, political, and cultural interconnectedness among the various actors in the global system. In the economic arena it represents a process of integration of national economies with the global economy (Mengisteab, 2005).

Globalization is the historic process of economic integration and cultural homogenization across national borders fostered by significant advances in transportation and communication technologies after World War II.

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