Driving Growth and Innovation: Exploring Foreign Direct Investment in the Manufacturing Sector (The Case of Lithuania)

Abstract

Recent geo-economic transformations have led to new challenges for countries in their economic development. The evolving global landscape has emphasized regional competitiveness and attractiveness in terms of capital, labor force, and information. Scholars widely agree that countries receiving foreign direct investment (FDI) gain new knowledge, management skills, and advanced production techniques, leading to increased competitiveness and economic growth (Bayar, et. al., 2020). Changing conditions have also influenced investors’ behavior. Globalization and digitalization have shaped international economic relations, focusing not only on resource acquisition, but also on leveraging human capital, knowledge, institutional structures, and networking for firm efficiency. This shift is reflected in changing investors’ preferences: the importance of natural resources, cheap labor, and the size of the national market has decreased, with greater attention given to service- and technology intensive manufacturing markets (Sadeghi, et. al., 2020). The aim of this study is to identify the factors that determine the attraction of foreign direct investment in the Lithuanian manufacturing sector and assess their impact. To accomplish this objective, several main tasks were formulated: 1) Highlight the necessity for assessing FDI attraction in the manufacturing sector. 2) Identify the factors that influence the attraction of foreign direct investment in the manufacturing sector. 3) Provide empirical evidence of the impact of these factors. The article is structured as follows: Firstly, a review of the scientific literature was conducted to address the research problem, which is the lack of literature on foreign direct investment at the sectoral level. Based on this literature analysis, the factors influencing investment attractiveness at the regional and sectoral levels were identified and compared. Additionally, the factors that determine the attractiveness of the manufacturing sector for investment were also identified. In the second part of the study, a research methodology was developed to assess the impact of these factors on foreign direct investment in the Lithuanian manufacturing sector. The results of the third part of the study indicated that although the Granger causality test did not reveal any causal relationship between FDI in Lithuanian manufacturing and variables such as exports, imports, gross domestic product, the number of educated individuals, government gross debt, government R&D expenditure in manufacturing, the number of FDI enterprises in manufacturing, the wage index, and labor productivity, the correlation analysis demonstrated that exports, gross domestic product, and labor productivity have a significant influence on attracting FDI to the industrial sector. These macroeconomic indicators were statistically significant both in the short term and in the long run. Empirical findings indicated that labor productivity has the greatest impact on the attractiveness of foreign direct investment in the Lithuanian manufacturing sector, both in the short and long term. To maintain the viability and promote the development of the manufacturing industry, Lithuania should focus on the factors that affect labor productivity in this sector. Keywords: investment attractiveness, foreign direct investment, manufacturing sector, sectoral determinants of investment.