Digital Infrastructure and its Impact on Foreign Direct Investment in Central and Eastern Europe

Abstract

This study examines the impact of digital infrastructure on foreign direct investment (FDI) inflows in seven Central and Eastern European (CEE) countries over the period 2004 -2023. Using panel data techniques, we analyze the relationship between three digital infrastructure indicators - internet penetration, broadband subscriptions, and mobile network coverage - and FDI inflows as a percentage of GDP. Our empirical strategy employs pooled OLS, fixed effects, and random effects models, with the Hausman test guiding model selection. Results indicate that digital infrastructure significantly influences FDI attraction in the region. Among the three indicators, broadband subscriptions exhibit the strongest positive effect on FDI inflows, followed by internet penetration. The findings remain robust across alternative specifications, including two-way fixed effects, lagged digital variables, and a composite digital infrastructure index. Control variables such as market size, GDP growth, trade openness, and institutional quality also play significant roles. This research contributes to the FDI determinants literature by highlighting the importance of digital connectivity in emerging European economies and provides policy implications for governments seeking to enhance FDI attractiveness through digital infrastructure investments.