Analysis of inward and outward foreign direct investment in Baltic States: juxtapose of Lithuania and Estonia

Abstract

This paper examines Foreign Direct Investments (FDI) and the main factors causing its movement from source to host economies, and vice versa, by juxtaposing data from two Baltic States - Lithuania and Estonia. In addition, this work explains the situations under which FDI tends to substitute exports or imports; how FDI contributes to Gross Domestic Product (GDP) growth; how human resources affect the decision to initiate foreign investment; and to what extent tax burdens influence FDI. The study introduces a simplified statistical model, which determines causal relationships between macroeconomic variables and inward/outward FDI to Lithuania, while comparing Estonia. Data ranges comprise Lithuanian and Estonian GDP, foreign trade, taxes, labor costs, and productivity over the last decade. The study proposes a list of significant factors, which could help reassess FDI regulatory means in Lithuania.