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The significance of foreign direct investment (FDI) and trade openness: evidence from nine European economies

Author

Listed:
  • Evans Yeboah

    (Mendel University)

  • Alexander Amo Baffour

    (Pentecost University)

  • Haggai Chibale Chibalamula

    (Mendel University)

  • Francis Atiso

    (Tomas Bata University)

Abstract

This study examines the impact of foreign direct investment (FDI) and trade openness on economic growth in nine European countries using World Bank data (1995–2021). The analysis employs the Pooled Mean Group (PMG) Autoregressive Distributed Lag (ARDL) model to capture both short- and long-run dynamics. The findings indicate that FDI has a positive short-term effect but a negative long-term impact on economic growth. Similarly, trade openness stimulates growth in the short run but exerts a negative influence in the long run. Gross fixed capital formation has no immediate effect on GDP per capita but contributes positively in the long term. Granger causality tests reveal a unidirectional relationship from GDP per capita to both trade openness and gross fixed capital formation, while a bidirectional relationship exists between gross fixed capital formation and trade openness. These findings suggest the need for balanced policy measures to maximize the benefits of FDI and trade openness while mitigating long-term risks. Policymakers should focus on strengthening domestic industries, enhancing economic resilience, and implementing strategies to improve the absorptive capacity of FDI to optimize its long-run contributions to growth.

Suggested Citation

  • Evans Yeboah & Alexander Amo Baffour & Haggai Chibale Chibalamula & Francis Atiso, 2025. "The significance of foreign direct investment (FDI) and trade openness: evidence from nine European economies," SN Business & Economics, Springer, vol. 5(3), pages 1-21, March.
    • Handle: RePEc:spr:snbeco:v:5:y:2025:i:3:d:10.1007_s43546-025-00798-8
    DOI: 10.1007/s43546-025-00798-8
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