Origins of Foreign Direct Investment in Croatia: Application of an Expanded Gravity Model

This paper examines the origins of FDI into the Republic of Croatia following the dissolution of Yugoslavia and on the eve of Croatia’s EU expected 2013 accession, paying special attention to gravity effects. Pioneered by Jan Tinbergen (1962), the gravity model posits that interaction between two countries is positively associated with their mass and negatively associated with the distance between them. Six expanded gravity models are set forth to analyze FDI, with dependent variables defined as cumulative FDI value from 2000-2009, FDI during the global recession (2008-09), and FDI measured by the number of transactions. Results show that Croatia fits a distinctive transition economy scenario that favors follow-the-leader firms from nearby (especially EU) origins. Another key finding is the role of shared history, which favors firms from the successor states of the Austro-Hungarian Empire and Yugoslavia. Policy implications of the results include a call for government action to enhance FDI facilitation and overcome remaining barriers for foreign firms. Given that this is among the first analyses of FDI into Croatia, suggestions for further research are also set forth.