FDI and Trade Connectivity in EU: New Evidence from a Non-linear Panel Smooth Transition VECM
FDI and Trade Connectivity in EU: New Evidence from a Non-linear Panel Smooth Transition VECM

Summary/Abstract: This study examines the relationship between real gross domestic product (GDP) per capita, trade openness and foreign direct investment (FDI) inflows, for the group of the European Union (EU) countries over the period 1995-2020. Using recently developed panel unit root and cointegration techniques, the empirical results confirm the existence of a long-run relationship among the variables. A structural break in the cointegrating relationship appears in 2009. Taking into account the 2009 regime shift, we estimate a panel smooth transition vector error correction model (PST-VECM) to examine whether real GDP per capita, trade openness, and FDI have non-linear short-term and long-term causal relationships. Our findings demonstrate how crucial it is to consider potential non-linearities when assessing fdi-trade-growth causality nexus and designing macroeconomic policies. Overall, the study's findings suggest that trade is a more effective growth stimulant, than FDI. Policy implications are then explored in the conclusions.

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