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Creating a host country-specific model of the relationship between gross domestic product and inward foreign direct investments – the case of the Bulgarian economy

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  • Milen Velushev

Abstract

The significant theories in the study of the relationship between inward FDI and GDP are examined, taking into account the importance of multinational companies being heterogeneous firms for the economic development of the host country. The conclusion is reached that a universal model cannot be applied, and therefore a specific model is created based on the data taken from the Bulgarian economy. It is discovered that there are three significant variables that affect the size of the inflow of FDI: the percentage increase in the GDP during the previous period, the percentage increase in the accumulated FDI and the increase in the so-called risk premium. The introduction of the last variable in the model is theoretically substantiated, alternatively using the theory of the optimal capital structure and the analysis of the IS-LM-BoP model. An examination is made of the data on the Bulgarian economy which show that the growth in FDI inflows is inversely related to the growth of the GDP during the previous period and to that of the risk premium, but that it is directly related to the growth in the accumulated FDI. The conclusion reached is that the growth in the FDI inflows depends primarily on the ability of the host country’s economy to create the necessary conditions to generate a sufficiently high return on FDI.

Suggested Citation

  • Milen Velushev, 2019. "Creating a host country-specific model of the relationship between gross domestic product and inward foreign direct investments – the case of the Bulgarian economy," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 3-21,22-39.
    • Handle: RePEc:bas:econth:y:2019:i:6:p:3-21,22-39
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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