Abstract
The aim of this paper is to examine the long-run and the short-run relationships between foreign direct investment (FDI) and economic growth in the Republic of Macedonia by applying the cointegration analysis and error correction model to identify the variables explaining FDI determinants in the Republic of Macedonia. The research further attempts to investigate the effect of FDI on economic growth of the Republic of Macedonia using the methodology of vector auto regression and Granger causality test in this specific country. Out of the general conclusions it is evident that despite the above-average growth rates in both gross domestic product (GDP) and FDI in the country, we have found that GDP does not seem to induce FDI and likewise, FDI seems not to induce GDP. It is possible that the nature of this relationship is influenced by other institutional and economic factors. The paper concludes by offering some suggestions to economic policy makers involved in FDI particularly those in transition economies and high-growth potential areas. Suggestions for future research and implications for practice are also stated in the paper.