THE RELATIONSHIP BETWEEN DIRECT INVESTMENT AND GDP IN ROMANIA

Abstract

According to the general theory, direct investment has many positive effects on the economy of a state. Romania has attracted a growing number of direct investments. Romania's economy is still marked by the transition from a closed to a market economy. Thus, the effects of communism are still felt today. However, it is making every effort to develop and provide its citizens with a better way of life in line with European norms. It is well-known that direct investments in a country creates opportunities for its economy and people. Various empirical studies have analysed the impact of direct investment on the GDP growth of a country. The present study explored the relationship between direct investment and Romania's GDP using bivariate VAR models. Granger causality principle was used to test the hypothesis that the volume of direct investments in the past explains the current GDP values and the current volume of direct investments. The study found that the rising trend in direct investments in Romania leads to the growth of GDP. The estimated VAR models for Romania provide evidence that increasing GDP results in increased direct investments in the country, reinforcing the idea that investors are sensitive to stable macroeconomic conditions. Subsequent research could also include a comparative study with European Union countries or the introduction of other variables such as inflation rate, unemployment rate, labor costs, etc.