THE CAUSAL LINKAGE BETWEEN POLITICAL STABILITY AND FOREIGN DIRECT INVESTMENTS IN BOSNIA AND HERZEGOVINA

Abstract

This research aims to explore the causal link between political stability (PS) and foreign direct investments (FDI) in the case of Bosnia and Herzegovina (B&H). The motivation to conduct this study lies in the fact that literature to date has paid little attention to the impact of political stability on FDI in the country of interest. In order to investigate the present causal linkage, annual time-series data were collected in the time-span running from 2002 to 2016. To provide empirical evidence we have employed the time-series econometrics. The obtained results indicate that political stability causes foreign direct investments. In addition, the results suggest that foreign direct investments have a causal link with the political stability. This result is of particular importance, given that Bosnia and Herzegovina can benefit significantly from the FDI, especially in the initial period, although long-term economic growth requires a sustainable and stable political environment. The outcome of this paper can provide significant insights for policy makers. This is why the concluding remark summarizes in detail the policy implications together with the recommendations for future research.