**1. Introduction**

In an increasingly globalized worldwide economy, investment is viewed as a catalyst for economic growth. For instance, foreign direct investment (FDI) influx supports development via productivity intensification through new investment, improved technologies, and decision-making abilities to the host nations [1–6]. Therefore, FDI lifts the host nation's economy by rising investible capital and by technological spillovers [7,8]. FDI is regarded as a collection of physical and immaterial capital that is shifted across borders and spill over to the local economy producing growth [9]. Similarly, FDI is a crucial factor in global economic integration and generates direct, stable, and long-lasting relationships between economies [10]. Moreover, Farla, et al. [11] marked off the "crowding in" which pretend that FDI will bring more investment from private inland sources and the "crowding out" which is the reverse.

In neoclassical models, long-term growth may ensue as the outcome of exogenously driven technical evolution and/or labor force growth [6]. Accordingly, new domestic businesses or the extension of the existing ones involve employment of individuals, therefore laying the grounds for the decline of the unemployment rate. Vojtovic, et al. [12] argued that FDI is generally the key provider of capital to founder of jobs for local workers, thus being connected to growth. Likewise, the link between FDI net influxes and poverty lessening is strongly significant [13]. Nevertheless, institutions exert a significant role in technological development [14]. Hence, host-country corruption impacts multinational firms' foreign investment decisions by producing economic settings that are either fortunate for or hostile to coherent economic activity [15]. Corrupt governments may hinder human progress that rise from FDI, while large levels of bribery will harmfully influence the positive outcome that FDI may have on human development [16]. Chen, et al. [17] proved that foreign companies from countries with higher institutional quality exhibit more efficient investment activities than firms from countries with poor institutions. Gossel [18],Barassi and Zhou [19],Egger and Winner [20] argued that corruption may act as a "grabbing hand" since paying bribes generates a variety of financial misrepresentations, but also as a "helping hand" due its facility to accelerate the bureaucratic courses. Khamfula [21] found that when the level of corruption rises, then FDI is prejudiced, but when the level of corruption is related with local investment, the effect on FDI is beneficial. Hence, Gilmore, et al. [22] emphasized a set of factors which drive the selection of host market: "FDI as a preference to other forms of foreign market entry, size, and growth of the host market, government emphasis on FDI and financial incentives, economic policy, cultural closeness, costs of transport, materials and labor, resources, technology, political stability, infrastructure".

With the enlarged incorporation of capital markets after the 1990s, FDI streams turn out to be more prevalent amid the developing nations [23]. FDI supported Central and Eastern European countries (hereinafter "CEECs") to change their product structure to get comparable to the more developed European Union (hereinafter "EU") nations. Therefore, momentum to economic growth is expected, alongside mitigation of the development gap among the more advanced CEECs and the EU [24]. For instance, Damijan and Rojec [25] established that FDI is a central driver of manufacturing field reform and productivity growth in Central European Countries. Different to other capital streams, FDI is less unstable and does not show a pro-cyclical conduct [26]. Likewise, FDI has an crucial role in the enhancement and structural recovery of the CEECs [27]. However, emerging states with matching economic and state governance structures fail to entice a comparable level of inward FDI due to unproductive business setting [28]. These states should counterbalance the compromise from the advantages that ensue from FDI, such as technology transfer and employment, with the costs allied with increased short-term flows [29]. Fawaz, et al. [30] highlighted extensive variances across high-income and low-income developing nations with reference to institutions, openness in capital markets, aversion to redistribution policies, or culture. Thus, Lipsey [31] argued that nations which show reliable and predictable legal systems and efficient public administration may get more investment than states with deprived governance. In the same vein, Tun, et al. [32] strengthened that better institutions entice more FDI inflows since it creates for multinational corporations a propitious business and investment environment. Nonetheless, according to Henderson [33], favoritism entails boundaries in capital markets, export/import markets, and licensing of production rights, all supporting companies that locate in the national capital. Also, Kottaridi, et al. [34] claimed that foreign investors are not confident in Central and Eastern Europe (CEE) countries' governments concerning proper use of funds in education. Hence, transition economies show lack of transparency, weak standards of business conduct, poor protection of creditor and minority shareholder rights [35]. The Central and Eastern European countries register fragile economic and social institutions, but show a high potential of economic growth attributable to unsaturated markets, as well as a great extent of FDI appeal because of the geopolitical status of the region [5]. Nevertheless, CEECs show a poor knowledge regarding harnessing the capital richness at their disposal, thus requiring an extended time for getting rid of bureaucratic impediments [36].

Previous papers explored the effect of FDI and institutional quality on economic growth for datasets covering Association of Southeast Asian Nations (hereinafter "ASEAN") states [37], developing countries, located in the lower- and middle-income groups [38], developing markets and developed economies [39], non-OECD nations [40], Pacific Island countries [41], African nations [42], North African states [43], Southern African countries [44], sub-Saharan African nations [45] or various groups of nations [46]. Therefore, the empirical evidence on foreign direct investment, institutional quality, economic growth link is limited for the CEECs. Throughout the communist regime, the transition economies were isolated, falling behind the Western part with reference to key technologies, skills, and capabilities [47]. The analysis of FDI within this region is important since it has acted as an imperative instrument for catching up. As such, the primary aim of current research is to empirically explore the influence of FDI on economic growth, also considering the institutional quality, for the case of CEECs. As well, measures regarding the 2030 Agenda for Sustainable Development [48] are covered, namely poverty (Goal 1: End poverty in all its forms everywhere), income distribution (Goal 10: Reduce inequality within and among countries), education (Goal 4: Quality education), innovation, transport infrastructure and, information technology (Goal 9: Build resilient infrastructure, promote sustainable industrialization and foster innovation), along with country-level controls. Subsequently, the causal associations between economic growth, FDI, and institutional quality will be explored. Our study differs from prior surveys on CEECs [5,12,49] in two ways: first, we consider the institutional context and, secondly, we provide evidence on the existing causal relationships. The novelty of current research is the broader inclusion of all Worldwide Governance Indicators, especially for the CEECs, as proxies for institutional quality, namely control of corruption, government effectiveness, political stability and absence of violence/terrorism, regulatory quality, rule of law estimate, voice, and accountability.

The remainder of the manuscript is organized as follows. The second section provides a survey of the related empirical studies. The third section presents the econometric methodology, specifically database, variables, and quantitative methods. The fourth section reports on the selected data and shows the quantitative findings of the study. The final section provides concluding remarks and policy recommendations.

#### **2. Literature Survey**

#### *2.1. Earlier Papers Worldwide on FDI–Economic Growth Connection*

The causal link between foreign direct investment (hereinafter "FDI") and gross domestic product (hereinafter "GDP") growth can run in either way [50]. In line with the "FDI-led growth hypothesis", FDI influxes can arouse growth for the host countries by rising the capital stock, generating new job opportunities, and easing the spread of technology. Conversely, the "market size hypothesis" supposes that a fast GDP growth making new investment opportunities in the host state can also cause higher inflows of FDI. Even if FDI is predictable to increase host economic growth, Zhang [51] exposed that the degree to which FDI is growth-enhancing appears to hinge on nation-specific features.

Iamsiraroj and Doucouliagos [52] performed a meta-regression analysis and emphasized a positive link between growth and FDI, being higher among single country investigations than within cross-country examinations. As such, Leitão and Rasekhi [53] explored the effect of FDI on real GDP per capita of Portugal, from 1995 to 2008, via panel data fixed-effects and random-effects regression models and found that foreign direct investment promotes growth. Mahapatra and Patra [54] supported the noteworthy role of FDI towards economic growth in India. Using provincial panel data from China, Chan, Hou, Li and Mountain [3] found both in the short and long-run that FDI has a significantly positive effect on GDP. The South Asian Association for Regional Cooperation (SAARC) was explored by Saini, et al. [55] which shown that FDI influx positively influence real GDP, gross national income, and export growth, but negatively financial position and trade openness. Likewise, Mahadika, et al. [56] provided evidence for Indonesia by means of vector autoregressive model that there is a long-term connection amid GDP, FDI, and export volume. Alshamsi, et al. [57] estimated an auto regressive distributed lag model for The United Arab Emirates and confirmed that GDP per capita had a significant positive connection with FDI. For the case of South Africa, Sunde [58] identified unidirectional causality running from foreign direct investment to economic growth. Kinuthia and Murshed [59] highlighted that economic growth drives growth of FDI in Kenya, whereas increase in FDI inflows Granger-causes an increase in economic growth in Malaysia. On the contrary, Akinlo [60] established for Nigeria that FDI positively influence growth, but after a sizable lag and it is not significant. In the same vein, Abdallah and Abdullahi [61] employed the vector error-correction model as method of estimation for Nigeria during 1980–2009 and revealed the lack of causal association among FDI and growth in the short term, but a negative relationship in the long term. Also, Yalta [50] noticed that there is no statistically significant association between FDI and economic growth in China. For the case of Turkey, from 1992–2007, Temiz and Gokmen [8] proved both in the short and long-run the lack of significant relationship between FDI and economic growth. Carbonell and Werner [62] reinforced for Spain that FDI is not a driver of growth.

Furthermore, Herzer, et al. [63] pointed out that cross-country studies mostly suggest a positive role for FDI in stimulating economic growth. Ndiaye and Xu [64] studied seven countries belonging to the West African Economy Monetary Union and confirmed the positive influence of FDI on growth. For a dataset comprising 35 developing and 31 developed nations, Ketteni and Kottaridi [9] noticed a positive impact of FDI on growth, but a growing effect as the share of FDI within the state increases. In contrast, Schneider [65] revealed for a panel sample of 47 developed and developing nations, from 1970 to 1990, that FDI show no significant relationship with economic growth, except for developed countries. As well, Herzer, Klasen and Nowak-Lehmann [63] noticed for 28 developing states that there occurs neither a long-term, nor a short-term effect of FDI on growth. Moreover, Dutta and Roy [66] proved that the association between financial development and FDI inflows is strictly non-linear, similar to Kottaridi and Stengos [67] which confirmed that a non-linear association occurs between FDI influxes and growth. By means of threshold regression, Jyun-Yi and Chih-Chiang [68] documented that FDI can endorse economic growth when the host nation has reached a particular threshold of development, initial GDP, and human capital. Correspondingly, Nguyen and To [37] found two threshold levels of FDI.

An overview of the studies on the foreign direct investment–economic growth nexus worldwide is provided in Table 1.


**1.**Earlier studies on FDI and economic growth worldwide.

**Table** 

#### *Sustainability* **2019**, *11*, 5421

#### *2.2. Previous Studies in CEECS on FDI–Economic Growth Link*

Transition economies may benefit from FDI since it could cover the current account scarcity, fiscal deficit, also supplementing insufficient inland funds to finance both ownership change and capital formation [35]. The CEECs reveal the advantage of refining their legal and institutional backgrounds as a prerequisite for joining the EU, thereby improving their benefits in order to call foreign investors [75]. In this regard, Jones, et al. [76] emphasized that EU affiliation had a significant consequence on the FDI in the CEECs, more than doubling the amount of the projects placed in these states compared to before the beginning of the accession dialogs. As such, a positive impact of FDI on growth is predictable. For instance, Campos and Kinoshita [77] explored 25 transition economies in Central Europe and in the former Soviet Union from 1990 to 1998 and found that the effect of FDI on economic growth is positive and statistically significant. Apergis, et al. [78] explored 27 economies in transition during 1991–2004 and concluded that FDI has a significant connection with economic growth in the case where all states are encompassed in the sample. Nevertheless, after the sample was divided into low- and high-income nations and in states with effective and not effective privatization plans, the inference preserve only for the case of the high-income economies and economies with fruitful denationalization agendas. Yormirzoev [79] investigated the states of Central and Eastern Europe, alongside the Commonwealth of Independent States, from 1992 to 2009 and confirmed a positive association between FDI and growth. Hlavacek and Bal-Domanska [49] investigated Central and Eastern European nations amid 2000 and 2012 and proved that statistically significant associations occur among economic growth, FDI, and investment growth. By exploring 16 Central, Eastern, and Southeastern European states during 1998–2013, Miteski and Stefanova [80] documented that FDI influxes in industry and services positively influence economic growth, whereas FDI in the construction sector did not show a statistically significant effect.

On the contrary, Mencinger [81] proved for a sample of eight EU candidates in 2004 a negative relationship between FDI and growth explained by the fact that takeovers were the prime means of entrance for overseas investors, while the capital employed for purchasing the companies was later focused on consumption and imports, thus failing to increase efficiency. Baˇci´c, et al. [82] explored 11 CEECs from 1994 to 2002 and found that FDI is insignificant for growth. Kherfi and Soliman [83] found a negative or statistically insignificant effect of FDI on economic growth in MENA and non-EU accession CEECs, but a positive impact only in EU accession countries. Hence, FDI role concerning growth in transition economies is conditional upon applying extensive economic transformations or pointing out solid engagement to completing such reforms. As well, Ferencikova and Dudas [84] analyzed eight new EU member states during 1993–2003 and proved that the influx of FDI did not support economic growth, whereas wide FDI influxes are followed by slow GDP growth. Curwin and Mahutga [85] reinforced for 29 Central and Eastern European and Eurasian post-socialist transition nations from 1990 to 2010 that FDI diffusion lessens economic growth in the short and long term. Saglam [86] established for 14 European transition states for the period 1995–2014 that economic growth rate decreases by 0.0162% when FDI increases by 1%.

A summary of the existing literature on the foreign direct investment–economic growth nexus in CEECs is provided in Table 2.



#### *2.3. Preceding Examinations on FDI–Institutional Quality Association*

The association among institutional factors and FDI is generally defined through its positive or negative consequences, with features such as self-governing organizations, political solidity, and rule of law appealing FDI and issues such as corruption, tax policies and cultural distance discouraging FDI [97]. Dunning [98] postulated that a company requires ownership, location, and internalization benefits to cross borders and engage in FDI. Furthermore, the institutional theory of North [99] highlighted that institutions set out market guidelines, shape connections between economic actors and guarantee that economic arrangements are circumscribed by these directions. However, investors are refractory with reference to states where institutional ambiguities boost bribery, red tape rises the transaction cost of investment, and where the administration can seize investments [100]. Multinational corporations are fascinated by states wherein civil and political independence is valued [101]. Therefore, good quality institutions in the host state are a prerequisite for appealing FDI influxes into that nation [102].

According to Buchanan, Le and Rishi [2], FDI goes to states with better quality institutions, while reduced governance can obstruct FDI. Xu [103] supported that economic freedom of both the homebased state and the host nation are positively associated with FDI. Adversely, Daniele and Marani [104] revealed that crime appears as a disincentive for foreign investors arguing that high levels of crimes are viewed as a signal of a local socio-institutional setting adverse for FDI. Akhtaruzzaman, et al. [105] proved that a one-standard-deviation decrease in seizure risk is related with a 72% rise in FDI. Similarly, Peres, et al. [106] reported for developed states that a one-standard-deviation modification in governance affects FDI by a factor of 0.2225, while the association is not significant for developing countries. By generating ambiguity in investment outcomes and by dropping the anticipated returns, fraud daunts the investment activity of the businesses, which renders into forgone economic growth [107]. The "grease the wheels" hypothesis supported by Kato and Sato [108] advises that corruption can accelerate economic activity under conditions of weak governance structures and ineffective policy. Elheddad [109] underlined that overseas companies choose to invest their money in corrupted extents which let them more admission to the natural resource and reduced taxes. Quite the reverse, the "sand the wheels" hypothesis proved by Meon and Sekkat [110], Cooray and Schneider [111], claims that corruption can be expensive for economic activity. Farla, Crombrugghe and Verspagen [11] did not provide robust evidence of a positive connection amid "good governance" and upper levels of investment but exhibited that the interplay between foreign investment and governance has an adverse mediating consequence on investment.

A brief review of previous papers on the FDI and institutional quality connection is exhibited in Table 3.


