Foreign Direct Investment and Economic Growth in the Republic of Kosovo—Empirical Evidence

Whether Foreign Direct Investment (FDI) is beneficial to host country growth or not, it is a question debated since a long time (Acaravci & Ozturk, 2012). This paper will examine the flow of FDI and their impact on economic growth in the Republic of Kosovo. This correlation between FDI and economic growth will be studied through regression (Quantile Regression Median). The results of the study will be obtained using multiple regression to evaluate the effect of FDI on the economy, using secondary annual data from 2007 to 2017. In addition to the basic model to be used to assess the impact of FDI on total growth amount, we have also decomposed them into the second model: FDI in manufacturing and FDI in services as well as other FDI. The research results show that the impact of total FDI and FDI in manufacturing is negative and insignificant while the impact of FDI in services and other FDI is positive but insignificant to economic growth in Kosovo. Due to the importance of FDI, as an important source of capital in a transition country such as Kosovo, these results are informational for decision-makers to improve policies in order for the country to become more attractive in attracting FDI.

29 million) (KPMG, 2017). However, FDI in Kosovo in 2017 amounted to 287.8 million euros, representing an increase of 30.8 percent compared to 2016. Within the structure of FDI, the capital and the investment fund in stocks were characterized by increase in value, while investment in debt instruments marked a decrease. The capital and the investment fund in stocks, which account for about 91.9 percent of total FDI, amounted to 264.5 million euros, which is 44.9 percent more compared to the previous year. FDI in the form of debt instruments marked the value of 23.2 million euros, or 37.9 percent less compared to the previous year. FDI growth was mainly evidenced by the financial services sector, real estate and the construction sector, while the trade and industry sector declined (CBK, 2018) ( Figure 2).

Figure 2. Capital and Investment Funds in Stocks and Debt Instruments
Source: KAS (2018) and calculation of authors.
The relationship between FDI and economic growth has long been a topic of great interest in the field of international development (Trinh, 2015). The macroeconomic findings on growth and FDI must be viewed sceptically, however (Carkovic & Levine, 2002). A recent literature survey by Bruno and Campos (2013) shows that 50% of empirical studies report a significantly positive effect of FDI on growth, 11% find a negative effect while 39% find growth to be independent of FDI. It thus seems that FDI plays an ambiguous role in generating economic growth, with little support for an independent positive effect (Jude & Levieuge, 2015). Wang (2009) suggests that the ambiguous (or doubtful) results related to the FDI impact on economic growth may be caused by the use of FDI total. According to Wang (2009), previous studies underestimate the effect of increased output from FDI due to aggregation. According to the author, the results show that the effect of increased output from FDI is much stronger than the effect of total FDI growth. Furthermore, without the decomposition of total FDI inflows, the effect of manufacturing FDI

Capital and Stock Investment Funds Debt Instruments
on host country's economic growth is understated by at least 48%.
In this research, we have taken a case study about Kosovo to estimate the impact of FDI on economic growth. The section below will be organized as follows: Chapter 2 contains the theoretical aspect about the FDI. Chapter 3 presents a review of literature describing the role of FDI in the economy. Chapter 4 contains the methodology and interpretation of the data and at the end, Chapter 5 includes conclusions and recommendations.

Theoretical Aspect
FDI occurs when an individual or firm acquires controlling interest (typically defined as at least 10% ownership) in productive assets of another country. The study of FDI can be divided into two broad categories. The first is the inquiry into why multinational production occurs and the factors that determine the patterns of worldwide FDI. The second is the impact that FDI and MNEs have on the parent and host countries, including economic growth, returns to factors of production, and externalities for innovative activity (Blonigen, B.A.).
The rapid growth of FDI has resulted from global competition as well as from the tendency to free up financial, goods and factor markets. It has been observed that FDI flows continue to expand even when world trade slows down. The choice between exporting and FDI depends on the following factors: opportunities for market growth, production cost levels, and economies of scale. FDI allows a firm to circumvent actual or anticipated barriers to trade. Another motive is the real appreciation of the domestic currency, which reduces the competitiveness of exports (Moosa, 2002).
Different perspectives imply different classifications of FDI. From the perspective of the investing country, FDI can be classified into horizontal FDI, vertical FDI and conglomerate FDI (Caves, 1971) quoted in (Tvaronaviciene, Kalašinskaité, & Šimelyté, 2009). Vertical FDI is undertaken for the purpose of exploiting raw materials (backward vertical FDI) or to be nearer to the consumers through the acquisition of distribution outlets (forward vertical FDI), Moosa (2002). Horizontal investments replicate the complete production process of the home country in a foreign country. The horizontal FDI seeks to take advantages of a new large market, which is considered as traditional motive for the FDI (Botric & Skulic, 2005), quoted in (Kurtishi-Kastrati, 2013). Conglomerate FDI, involves both horizontal and vertical FDI (Moosa, 2002).
Recognising that there are other reasons for FDI than differences in factor endowments and factor prices, trade economists have begun to embrace increasing returns, imperfect competition and product differentiation in addition to the traditional comparative advantage paradigm and where multinationals have been incorporated and made endogenous. The first attempts were by Helpman (1984) (1957) and MacDougall (1960). The theories discussed above are based on the assumption of perfect competition in domestic factor and/or product markets. They belong to the traditional trade theory that has dominated for decades, based on competitive, constant-returns models, quoted in (Latorre, 2008).
Hymer made a profound and enduring distinction between portfolio and direct foreign investment. The distinguishing feature between the two is that FDI implies control of the operation whilst portfolio foreign investment confers a share of ownership, but not control. This is important because the traditional theory of investment based on differential interest rates, after accounting for the risk premium, does not explain FDI. Hymer (1960)  place when the benefits of exploiting firm-specific advantages (FSAs) across borders allow overcoming the additional costs of doing business overseas. According to Hymer's ideas, it has been argued that MNEs have firm specific advantages allowing them to operate profitably in foreign countries, quoted in (Kastrati, 2013). While FDI theory thus largely builds on assumptions of market imperfections, these assumptions have rarely been extended to explicitly include financial markets, or -when they havefocus has been on explaining the effect of exchange rates (rather than firm-level financial characteristics) on FDI (Kogut & Kulatilaka, 1994;Froot & Stein, 1991;quoted in Forssbaeck & Oxelheim, 2008).
International production theory suggests that the propensity of a firm to initiate foreign production will depend on the specific attractions of its home country compared with resource implications and advantages of locating in another country. This theory makes it explicit that not only do resource differentials and the advantages of the firm play a part in determining overseas investment activities, but foreign government actions may significantly influence the piecemeal attractiveness and entry conditions for firms. A related aspect of this foreign investment theory is the concept of internalisation which has been extensively investigated by Buckley (1982Buckley ( , 1988 and Buckley andCasson (1976, 1985; quoted in Morgan & Katsikeas, 1997). Hymer's analytical framework involved a focus on the superior profitability which he perceived internalisation would confer on firms: first from their ownership of, or access to, particular assets, competences, co-ordinating abilities; and second, from an increase in market power through the reduction of competition. Hymer treated these two benefits arising from control as being the same. He claimed that the control of the foreign enterprise is desired in order to remove competition between that foreign enterprise and enterprises in other countries (Hymer, 1976).
This treatment is questionable. While any reduction of rivalry or inter-firm collusion are practices almost exclusively concerned with power-control, rather than with efficiency enhancement (Dunning & Pitelis, 2008;quoted in Dunning & Pitelis, 2009).
Understanding the factors behind FDI has become an interesting research issue, mainly because, although with some misgivings, FDI is considered to be a key driver of economic growth.
Consequently, there is a vast literature devoted to the study of FDI determinants and to explain the existence of significant disparities in the distribution of FDI flows across countries (Portilla, Maza, Villaverde, & Hierro, 2016). The eclectic paradigm (Dunning, 1981(Dunning, , 1988a(Dunning, , 1993a) offers a framework to explain patterns and the extent of international production undertaken by firms involved in foreign value adding activities. The eclectic paradigm suggests that the extent and nature of the overseas activities of a firm of a particular nationality depends on the extent to which they possess or can gain assets in a foreign country that firms find beneficial to combine with or add value to their ownership advantages, rather than undertake the production in their home country. These are called locational (L) specific advantages, quoted in (Dunning & Narula 1993). Some commentators (e.g., Vernon, 1985) have alleged that the eclectic paradigm is couched in static terms and is unable to explain the dynamics or the process of change of international production. Dynamics can be interpreted and modelled in various ways; Vernon's particular concern is that the eclectic paradigm fails to allow for the behavioural interaction between international oligopolists, which both affect and are affected by their foreign activities, quoted in (Dunning, 1987).
Calvet (1981) explains the theories of FDI that included: FDI in the context of the theory of markets.
The market imperfection theory asserts that market disequilibrium hypothesis provides an incentive to invest abroad. The factor markets such as labour and capital markets persuaded organizations to invest in other countries. The cheap labour persuaded firms to move investment from high labour cost to countries with low labour costs. The governments in the home countries imposed distortions such as policies, tariffs, prices and wage rigidities some of which led by trade unionised industries that impeded FDI, quoted in (Sikwila, 2014). Buckley and Casson (1976) identified five types of market imperfections that result in internalization: (a) the co-ordination of resources requires a long time lag: (b) the efficient exploitation of market power requires discriminatory pricing; (c) a bilateral monopoly produces unstable bargaining situations; (d) a buyer cannot correctly estimate the price of the goods on sale; and (e) government interventions in international markets creates an incentive for transfer pricing, quoted in (Nayak & Choudhury, 2014).
Drawing upon strategic management, in which FDI strategy cannot be explained by straight-on economic reasoning or asset-based arguments, but requires viewing FDI as part of its broader context, e.g., allowing for managerial discretion or a firm's competitive situation. The strategic management literature questions the view that MNCs react in similar ways on similar constraints and opportunities.
The perspective brings to the fore the role of the manager in navigating through complexity to make decisions regarding global allocation of resources. Moreover, the perspective moves from a focus on the firm to a focus on interaction of firms (Nielsen, 2005; quoted in Hoenen & Hansen, 2009).
However, the locational strategies actually chosen by firms are likely to be highly contextual; and to vary according to industry specific characteristics, the motives for FDI, and the functions being performed by MNE subsidiaries. According to Dunning, quite apart from the impact of the current economic slowdown and the events of September 11th, the internet, the widening scope of the knowledge based economy, and regional integration schemes are also affecting the geography of FDI.
As to the role of governments as they seek to attract MNE activity, Dunning believes they need to recognise that the location specific advantages sought by mobile investors are changing. While in some countries, e.g., the larger developing countries, such traditional economic variables, e.g., the availability of cheap labour, natural resources and market size, remain important, in others, e.g. the more advanced industrialised countries, MNEs are increasingly seeking complementary knowledge intensive resources and capabilities, a supportive and transparent commercial, legal communications infrastructure, and a gamut of government policies favourable to globalisation, innovation and entrepreneurship (Dunning). Dunning (2000) has suggested that, for the most part, the many and varied explanations of the extent and structure of FDI and MNE activity are complementary, rather than substitutable for, each other, and are strongly context specific. The author has further observed that, as the international production by MNEs has grown and taken on new patterns, as the world economic scenario has changed, and as scholars have better understood the raison d'ê tre for FDI, so new explanations of the phenomena have been put forward, and existing explanations have been modified and, occasionally, replaced.

Empirical Aspect
Aim of Asteriou and Moudatsu (2014) was to examine whether the contribution of FDI on growth is relatively more important in countries with well-developed financial markets compared to those with the less-developed ones, including the time period from 1988-2009, using yearly macroeconomic data for a sample of 73 developing countries. Empirical methodology consists of panel-growth regressions.
Results suggest that the FDI make substantial contribution to growth where financial systems function effectively, such as high-income countries, while the FDI impact is found to be insignificant in cases where relatively weaker financial systems exist. Authors also looked at the direct effect of the FDI and found that it is significant for the high and middle-income countries rather than for the low-income countries examined.
Carkovic and Levine (2002)  . In a log-linear model, the Cobb-Douglas production function is estimated to examine the productivity effect of: a) foreign ownership in firms, and b) foreign presence in industries and regions.
In the first case, regression coefficients indicate a positive correlation between foreign equity participation of forms and plant productivity. In the second case, the impact of foreign investment on productivity of domestically owned firms turns out to be either negative or insignificant. Thus, the study corroborates the hypothesis that technology is transferred internationally through multinational companies, but provides no evidence of diffusion of technology from foreign to domestic firms.
Jude and Levieuge (2015) (2015)  Likewise, the economic openness index and public expenditure explained the growth in production for the decade; however, the relationship was determined by negative signs, which could be explained by the short temporality used.
Antwi, Antwi and Poku (2013)  The significance of the trade opening coefficient confirmed that foreign investment makes export-oriented investments in Ghana. The exchange rate coefficient is positive and significant at the level of .01. The infrastructure indicator is seen as negative and important. Gunby, Jin and Reed (2015) in this study conducted a research through regression that estimated the relationship between FDI and Chinese economic growth. The sample included 37 studies and a total of 280 estimates. The initial "raw" finding is that FDI has had a substantial, positive impact on Chinese economic growth. Furthermore, our results suggest that the effect is not inflated by endogeneity, nor impacted by publication bias. However, the positive effect is found to be smaller for more recent and better designed studies. When the authors adjusted for preferred study and sample characteristics, they found that the estimated economic effect of FDI on Chinese economic growth is much smaller than indicated by the overall literature, and statistically insignificant.
Adegboyega and Odusanya (2014) tried to examine the relationship between trade openness, FDI, capital formation and economic growth rate in Nigeria over a period of 25 years (i.e., 1986 to 2011) by using time series data analysis. Also, the result of the study shows a long-term equilibrium relationship of the gross domestic growth rate and explanatory variables. The study shows a positive, but insignificant, relationship between the volume of FDI and the growth rate of gross domestic product.
On the other hand, the opening of trade in capital formation also shows a positive effect on economic growth, while it is still statistically significant. Ekanayke and Ledgerwood (2010) analysed the effects of FDI on the economic growth of developing countries by using annual data on a group of 85 developing countries covering Asia, Africa, and Latin indicated that FDI appears to have a positive effect on economic growth in developing countries.
Finally, when the model was estimated for different income levels, FDI has a positive sign in three out of four cases. However, this variable is negative for low-middle-income countries indicating that foreign aid has a negative effect on economic growth in these countries. Borensztein, Gregorio and Lee (1997) tested the effect of FDI on economic growth in a cross-country regression framework, on FDI flows from industrial countries to 69 developing countries over the last two decades. Their results suggest that FDI is an important vehicle for the transfer of technology, contributing relatively more to growth than domestic investment. However, the higher productivity of FDI holds only when the host country has a minimum threshold stock of human capital. There is a strong positive interaction between FDI and the level of educational attainment. The authors also found some evidence that FDI is complementary to domestic investment. This effect, however, seems to be less robust than authors' other findings. (2008)   accumulation of FDI depends less on the importance of their market and more on the efficiency of the government and the reduction of investment risk.

Mun, Lin and Man
Factors that determine FDI inflows in terms of fiscal, economic, political and institutional dimensions, were empirically explored by Gedik (2013)  FDI does not prefer high tax environments. In the second model, the growth of debt stock and inflation put a risk on investment. In addition, as high labour costs will increase costs, such an environment is not preferred to the investor. The coefficient of these three indicators found as a result of the analysis has a negative value, which is simultaneously parallel to theoretical forecasters. Also, political and institutional factors are of great importance to be considered along with economic and fiscal factors.

Data and Methodology
The main objective of this study is to assess the impact of FDI flows on the growth and economic development of the Republic of Kosovo. In this empirical analysis, the secondary annual data provided by the Kosovo Agency of Statistics for the period 2007-2017 will be used. The multiple regression model for data analysis to assess the impact of FDI on economic growth is used in most of the empirical research, so we will use the QRM (Quantile Regression Median) regression model in this research. According to empirical literature, most studies have researched the total impact of FDI on economic growth, and many other researchers have pointed out that to accurately estimate the impact of FDI on growth and economic development, their disaggregation in the manufacturing and service or even in a particular sector should be done, where the number of such researches is much smaller.
Taking this into account, we will use the impact of the total amount of FDI flows on the economic growth as a core model, while in the second model we will disaggregate FDI data into: FDI in manufacturing, FDI in services and other FDI (Tables 1, 2 and 3).   Source: Calculation of authors (2018).
In Table 4, we have the statistical description obtained with the dependent variables, i.e., GDP and independent variables -total amount of foreign direct investments, inflation, export and import as: average, median, maximum, minimum and other results as described above.
The Jarque -Bera test -according to the rule of the decision if Jargue Bera ≤ 4.61, at 5% of significance level, then in our analysis Jarque Bera is 0.745141, which means that the value 0.745141 ≥ 4.61. www.scholink.org/ojs/index.php/asir Applied Science and Innovative Research Vol. 2, No. 4, 2018  The multiple regression method used estimates the impact of total FDI flows on economic growth. As for the total of FDI, the effect is negative and insignificant at 5% level of significance for the period 2007-2017. The determination coefficient of 0.80 indicates that the model is well defined and that 80 percent of the variation in the dependent variable depends on the variation of independent variables.
The inflation rate coefficient is negative and insignificant at 5 percent level of significance. Also, exports are negative and insignificant, while imports have a positive effect with a 2.367073 share but insignificant. F-statistics (0.000054) indicates that the model is well-adjusted.
To estimate whether the research results are significant, we have also used the Anova analysis (Table 6).
For F = 29. 78344901, "p" value for 29.78344901 is 0.000425093, which means that this statistical analysis is significant.  Source: Calculation of authors (2018).
In Table 7, the correlation analysis shows that GDP has a negative correlation with total FDI and inflation. The results show that GDP has a strong positive correlation with exports and imports. Also, exports and imports have a high correlation between them. While total FDI has a negative relationship with imports and exports. investments do not affect GDP growth. The decline in the inflation rate affects GDP growth. Also, the growth of exports and imports has a positive effect on GDP.
In addition to the analysis of the impact of the aggregate FDI flows on economic growth, we have also analysed the allocation of total FDI in manufacturing and services to determine their impact on the economy, also using the QRM (Quantile Regression Median). The annual data from the Kosovo Agency of Statistics and authors' calculations are also used in this model for the period 2007-2017.
The econometric model used is as follows: ∆GDP=β 1 + β 2 ∆INV manufacturing+β 3 ∆INV service + β 4 ∆INF + β 5 ∆EXP + β 6 ∆IMP + u Also in this model dependent variable is GDP, while independent variables are -FDI in manufacturing, FDI in services, inflation, exports and imports for the period 2007-2017. Also, in Annex 2 we have the statistical description of dependent variables and independent variables. To assess whether the research results are significant, we have also used Anova analysis (Annex 3). For F = 49. 62349854, the "p" value for 49.62349854 is 0. 001035849, which means that this statistical analysis is significant.
In Annex 4, the correlation analysis shows that GDP has a negative correlation with FDI in manufacturing, other FDI and Inflation. Also, GDP has a very weak correlation with FDI in services.
The results show that GDP has a strong positive correlation with exports and imports. Also FDI in manufacturing and services has a negative relationship with imports and exports. FDI in manufacturing has a positive correlation with other FDI, while FDI in services has a negative correlation with other FDI. Also, exports and imports have a strong relationship with each other.

Conclusions and Recommendations
The main objective of this study is to estimate the flow of FDI and its impact on economic growth and development, using secondary annual data from 2007 to 2017 in the Republic of Kosovo. The data were analysed using the QRM (Quantile Regression Median) with "p" value of 5% significance. The results of the study showed that total FDI has a negative and insignificant effect on economic growth.
Inflation and exports have a negative and insignificant effect. While for imports, the effect is positive taking part with 2.367073, but the impact is insignificant. As for the disaggregation of total FDI, there is a negative and insignificant relationship for FDI impact in manufacturing. While for FDI in services and other FDI, the effect is positive, taking part with a very low value of 0.005407 and 0.015415, but with insignificant impact. Also, inflation and exports are negative and insignificant, while imports have a positive effect, taking part with 2.914291, but not important for the economy. One of the main factors that has affected decline of Kosovo in foreign investment in recent years is the lack of political stability in the country.
Regarding the impact of foreign direct investment on economic growth, the results of this study do not match the empirical literature that total FDI impact on economic development in developing and transition countries, but our survey results match the empirical literature that FDI does not have a positive effect on low-income countries. Also, according to FDI decomposition empirical literature, FDI in manufacturing impacts on economic development, while the results of our study show the www.scholink.org/ojs/index.php/asir Applied Science and Innovative Research Vol. 2, No. 4, 2018 opposite that FDI in manufacturing does not have a positive effect on the economy, while FDI in manufacturing and other FDI have a positive effect but without significant impact. This positive effect of FDI in services is due to the fact that foreign banks in Kosovo account for 90.0 percent of capital within the total capital of all the banks operating in the country and the successful business activity of the banking system.
Since FDI is an important source of capital in developing and transition countries, as in the case of Kosovo, policy makers have to do policy reforms, improve infrastructure and law on investments, and increase trade performance. According to Pandya and Sisombat (2017), export performance is an indicator of the country's ability to attract FDI to the country. Also, various fiscal favourable conditions should be offered, where they are still considered as barriers for foreign investors in Kosovo. According to Owusu-Antwi, Antwi and Poku (2013), every aspect of host countries' economic and governance practices affects the investment climate. According to KAS (2018), the unemployment rate in Kosovo is 26.5 percent, so considering that FDI can affect employment growth, the government should attract foreign investments, especially in the manufacturing sector, in order to reduce unemployment in the country.
Due to the importance of FDI flows in Kosovo, future research should also focus on FDI study in every economic sector. It is also important that research be expanded, including other variables such as: different institutional factors and human capital. Future FDI analysis should be extended by using the Granger Causation Test, considering that empirical research of this type is lacking in the country.