Factor analysis of Lithuanian and Estonian inward foreign direct investment

Abstract

The paper examines trends of foreign direct investments (FDI) in the Baltic States and macroeconomic factors causing FDI flow from capital exporting countries to host economies. Authors analyze the conditions under which FDI is likely to replace export or import. Questions, how FDI adds up to GDP growth, how labor costs affect decision to start foreign investment, to which extent tax burden suspends FDI are tackled. A simplified statistical model, which determines causal relationship between macroeconomic variables and inward FDI to Lithuania and Estonia is used. Data range comprises Lithuanian GDP, foreign trade, taxes, labor costs and productivity over the last decade. Authors formulate policy implications in order to increase efficiency of FDI regulation in Lithuania.