Growth Dynamics of Green and Brown Foreign Direct Investment in Central and Eastern Europe: Evidence from ARDL and NARDL Models

Abstract

This paper examined the effect of green and brown foreign direct investment on economic growth in ten Central and Eastern European countries. It also examines how trade openness, inflation, and consumption of renewable energy determine long and short-term economic performance, and the asymmetric impacts of foreign direct investment composition are also highlighted. The Annual data between 1995 and 2024 was estimated by Autoregressive Distributed Lag (ARDL) and Nonlinear ARDL (NARDL) models to estimate the short-run dynamics and long-run equilibrium relationships. To establish the order of integration, stationarity tests, such as the Augmented Dickey-Fuller and Phillips-Perron, were performed. The analysis of cointegration and asymmetry effects was done to measure the relative contribution of green and brown foreign direct investment to GDP growth. Empirical evidence shows that the impact of green foreign direct investment on the GDP is positive and statistically significant both in the long-term and in the short-term (effective only limited or even negative) in the short-term. Trade openness and the consumption of renewable energy have a positive effect on the growth of the economy, which shows the advantages of entering global markets and producing low-carbon technologies. Inflation negatively impacts the GDP, which proves the significance of macroeconomic stability in investment productivity. The results of the analysis also indicate a cointegration relationship amongst variables in the long run, and the asymmetric tests indicate that positive inflows of green foreign direct investment have stronger growth effects compared to the similar effects of reductions. The paper highlights how green foreign direct investment should be encouraged with strategic significance to support the long-term economic growth of transition economies. The policy measures that promote environment-based investments, trade facilitation strategy, and energy transition strategies have a significant impact on the attainment of low-carbon and inclusive development. The findings suggest that policy frameworks should prioritize environmentally sustainable investment and strengthen renewable energy transitions to achieve long-term economic growth.

Keywords: Green Foreign Direct Investment, Brown Foreign Direct Investment, Economic Growth, Trade Openness, Inflation, Renewable Energy, Central and Eastern Europe