Foreign direct divestment and economic performance in central and eastern europe: evidence from pre- and post-COVID-19 dynamics

Abstract This paper investigates how foreign direct divestment (FDD) shapes economic performance in Central Europe and the Baltics within the broader CEE classification over the period 2003–2024. While the literature has extensively examined the growth effects of foreign direct investment inflows, less is known about the macroeconomic consequences of foreign capital withdrawal and multinational restructuring. Using regional aggregate data from Invest Europe and the World Bank, the study assesses whether FDD affects GDP growth and whether this relationship changed after COVID-19. The results indicate that FDD is associated with weaker short-run growth performance, supporting the view that divestment may operate through capital withdrawal, productive capacity reduction, and uncertainty channels. However, the post-COVID interaction suggests a significant change in the FDD-growth relationship after 2020, pointing to the possibility that divestment in the post-pandemic period may also reflect restructuring, capital reallocation, and adjustment processes. The findings further show that domestic capital formation and unemployment remain important determinants of growth dynamics, while FDI inflows do not display a statistically robust association with growth in the preferred specification, a result that should be interpreted cautiously given the aggregate nature of the variable and the limited sample size. The paper contributes to the emerging literature on foreign direct divestment by treating it as a distinct macroeconomic phenomenon rather than merely the reverse of FDI inflows.