Economic infrastructure, private capital formation, and FDI inflows to Hungary
This paper investigates the important question of what relationship, if any, exists between economic infrastructure, gross fixed capital formation, and FDI inflows to Hungary during the 1995-2012 period. There has been little to no empirical analysis undertaken on this important topic in the case of transition economies such as Hungary. Utilizing single- break unit root and cointegration analysis with structural breaks, this study finds a stable long-run relationship among the included variables, thus an error correction model is developed to capture both the short-and long-run behavior of the variables. In the short run, lagged changes in economic infrastructure, as well as lagged changes in private capital formation are positively associated with changes in FDI inflows; dummy variables to capture the 2008 financial crisis and euro crisis had a negative and highly significant effect. In the long run, however, FDI inflows and private capital formation are substitutes for one another, while value added in economic infrastructure crowds in private capital formation. The real effective exchange rate is also positively correlated with FDI inflows in the long run. The VEC model leads to the general conclusion that FDI flows and real GFCF have a significant short-run adjustment mechanism, while economic infrastructure and the real exchange rate can be treated as weakly exogenous. (JEL, C22, F21, O52).
Key words : Granger causality test, error correction model (ECM), foreign direct investment (FDI), Gregory-Hansen single-break cointegration test, Gross fixed capital formation (GFCF), Johansen cointegration test, KPSS unit root test, vector error correction model (VECM), Zivot-Andrews single-break unit root test.