Assessing the interplay between FDI, stock market performance, and economy growth: A study of prominent European nations

Economic growth is a core objective for nations, particularly in Europe’s highly interconnected and competitive economies. This study explores the relationships between Foreign Direct Investment (FDI), stock market performance, and GDP growth across five major European economies Germany, France, the United Kingdom, Italy, and Russia during 1997-2023. These countries contribute significantly to Europe’s economic output and display diverse market structures and levels of global integration, making them ideal for cross-country analysis. FDI brings capital, productivity, and technological advancement, while stock markets reflect investor confidence and mobilize financial resources into productive sectors. Using secondary data from global financial institutions, the study employs Autoregressive Distributed Lag (ARDL) and Vector Autoregressive (VAR) models to capture both short- and long-term interactions. Stationarity tests showed that GDP and FDI were stationary at level, while stock market performance required differencing, justifying ARDL’s application. The results reveal that FDI has a negative short-term impact on GDP, likely due to transitional inefficiencies, but contributes positively in the long run as economies adjust. Stock market performance consistently boosts GDP in both the short and long term, highlighting its importance as a growth driver and a channel for attracting investment. Granger causality analysis indicates bidirectional relationships between FDI and stock market performance, underscoring their interdependence. The study also identifies a robust long-term equilibrium among the variables, resilient even during shocks such as Brexit, the COVID-19 pandemic, and geopolitical tensions. Policy recommendations include enhancing stock market efficiency and creating favourable environments for FDI to foster sustainable and resilient growth.