The Romanian External Trade And The Foreign Direct Investments Inflows After 2007. A Critical Survey

Focusing more on the evolution of the Romanian external trade and FDI inflows after 2007 - the year of Romania's EU integration - the paper provides insights in the trade and FDI inflows determinants in the context of the convergence process and also in relation to the financial global crisis. As the statistic data envisage, Romanian exports and imports were high over the period 2000-2010, and there were also large FDI inflows in the economy, mostly until 2008. Although the data appear to be encouraging, it seems that Romania did not succeed to maximize the benefits which should result from such a situation. Moreover, the situation after 2008 shows that Romania is in a deep recession accelerated and maintained by uninspired government policy measures with a strong negative impact on the Romanian economy. The aim of this paper is to empirically investigate Romanian export and import demand functions after the year 2007, and to compare them with those of the period 2000-2006, using quarterly data, in correlation with the FDI inflows. The main contribution of the paper is that it is an empirical analysis on Romania's FDI and external trade, providing the impact of the main determinants of export and import of Romania, by using the Engle-Granger two step method. Following Allard (2009) rather than just providing the elasticity, this method combines the elasticity with the evolution of the explanatory variables to quantify their impact during the analysed period. The analysis aim to cover all possible factors underlying the external sector performance of Romania and thus, they are complemented with country specific analysis. The empirical analysis will therefore provide some interesting insights not only in the context of the convergence process of the country with the Eurozone but also in relation to the exchange rate regime. The theoretical framework relies on the "imperfect substitutes" model (Goldstein and Khan; 1985), and it is used in the paper to estimate the demand functions of the Romanian exports. Furthermore, the effect of the FDI on export performance is also investigated. The conclusion which came out was, on one side that the export growth in Romania since 2007 is mainly due to strong FDI inflows since 2000, while the real exchange rate appreciation seems to not have significant impact on export developments of the country. On the other side, the significant imports growth was due to strong reduction in productivity and in the gross capital formation rate, which combined with the lack of domestic capital, have largely affected the private sector, and mainly the manufacturing one, on which the Romanian economy should rely on, mainly due to its competitiveness.