Abstract:

This study examines the impact of foreign direct investment (FDI) and domestic investment on economic growth in six Western Balkan countries: Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia, over the period 2008–2022. As transition economies integrating into European markets, these countries rely heavily on investment as a driver of sustainable growth. Understanding the relative contributions of foreign and domestic in vestment is important for effective policymaking.

The analysis uses annual panel data obtained from the World Bank’s World Development Indicators database. Economic growth is measured by annual GDP growth rates, while FDI net inflows (% of GDP) and gross capital formation (% of GDP) are used as indicators of foreign and domestic investment, respectively. Inflation and domestic credit to the private sector are included as control variables to account for macroeconomic stability and financial sector development. The study employs descriptive statistics, correlation analysis, fixed effects and random effects panel regression models, and the Hausman test to determine the most appropriate estimation approach. Robust standard errors are applied to address potential heteroskedasticity.

The empirical results indicate that both FDI and domestic investment positively influence economic growth in the Western Balkans. However, domestic investment exhibits a stronger and more statistically significant effect than FDI. The findings also show that financial sector development supports economic growth, whereas inflation negatively affects economic performance. The study concludes that long-term growth in the Western Balkans depends on strengthening domestic productive capacity, improving the investment environment, and enhancing financial sector efficiency. These results offer valuable policy insights for promoting sustainable economic development and stability in the region. 

Keywords:

Financial development; Gross capital formation; Macroeconomic stability; Panel econometrics; Transition economies; Sustainable growth.

How to Cite:

Sihana Hoxha Shala. The Impact of Foreign and Domestic Investment on Economic Growth in Western Balkan Countries: Evidence from Panel Data Analysis. [ref]: vol.24.2026. available at: https://refpress.org/ref-vol24-a11