Direct and indirect effects of investment incentives in Slovakia

Bobenič Hintošová, Aneta; Sudzina, František; Barlašová, Terézia Article Direct and indirect effects of investment incentives in Slovakia Journal of Risk and Financial Management Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Bobenič Hintošová, Aneta; Sudzina, František; Barlašová, Terézia (2021) : Direct and indirect effects of investment incentives in Slovakia, Journal of Risk and Financial Management, ISSN 1911-8074, MDPI, Basel, Vol. 14, Iss. 2, pp. 1-12, https://doi.org/10.3390/jrfm14020056 This Version is available at: https://hdl.handle.net/10419/239472 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Journal of Risk and Financial Management Article Direct and Indirect Effects of Investment Incentives in Slovakia Aneta Bobeniˇc Hintošová1, František Sudzina 2,3,* and Terézia Barlašová1   Citation: Bobeniˇc Hintošová, Aneta, František Sudzina, and Terézia Barlašová. 2021. Direct and Indirect Effects of Investment Incentivesin Slovakia. Journal of Risk and Financial Management 14: 56. https://doi.org/ 10.3390/jrfm14020056 Academic Editor: Gheorghe Zaman Received: 7 January 2021 Accepted: 28 January 2021 Published: 1 February 2021 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). 1Faculty of Business Economics in Košice, University of Economics in Bratislava, Tajovského 13, 04130 Košice, Slovakia; [email protected] (A.B.H.); [email protected] (T.B.) 2Faculty of Informatics and Statistics, University of Economics, nám. W. Churchilla 1938/4, 130 67 Prague, Czech Republic 3 Faculty of Engineering and Science, Aalborg University, A. C. Meyers Vænge 15, 2450 Copenhagen, Denmark *Correspondence: [email protected] or [email protected] Abstract: Countries trying to attract foreign direct investment often use various tools to influence the foreign investor’s allocation decision including public subsidies in the form of investment incentives. However, the effects associated with providing these incentives are often questioned, especially in light of the need to achieve at least a minimum level of attractiveness of the business environment. The primary aim of the present study was to examine the effects of investment incentives on foreign direct investment inflows (direct effect) and on selected macroeconomic variables (indirect effects) under the conditions in Slovakia. Findings showed that the preference of specific forms of investment incentives by the government of the Slovak Republic changed slightly in the observed period of 2002–2019. The results of the regression analysis further suggest that while financial incentives have a positive statistically significant direct effect on foreign direct investment inflows, in the case of fiscal incentives, this effect is the opposite. In terms of indirect effects of investment incentives, only a reduction in the unemployment rate through foreign direct investment was found. The study contributes to the literature by providing evidence on the effects of various forms of investment incentives and by offering some implications for investment promotion policy. Keywords: investment incentives; financial incentives; fiscal incentives; economic freedom; foreign direct investment; Slovakia 1. Introduction Topics connected with foreign direct investment have gained significant attention in the empirical literature in the recent years, especially in the context of transforming countries aiming to sustain their economic growth through various channels including foreign investment presence (e.g., Batrancea et al. 2020). Based on this, huge attention has been paid to factors determining the inflow of foreign direct investment (FDI) into particular country, with special emphasis on the Central European countries that became attractive investment locations of western investors in the last decade (e.g., Gauselmann et al. 2011; Gorbunova et al. 2012;Wach and Wojciechowski 2016). Based on Dunning (1981) eclectic theory, FDI is influenced by three sets of advantages, of which specific location advantages are considered as home country investment determinants. Location decision-making, in turn, contributes to the formation of the economic and social landscape (Sucháˇcek et al. 2017). A detailed investigation of the effects of these location factors, especially those forming economic advantage, on attracting FDI is subject to wide discussion in the literature. With regard to the Central and Eastern European countries, factors such as production costs (e.g., Riedl 2010;Gauselmann et al. 2011), market size, trade openness (e.g., Janicki and Wunnava 2004;Galego et al. 2004;Demirhan and Masca 2008), and other macroeconomic variables (e.g., Plikynas and Akbar 2006;Bobeniˇc Hintošováet al. 2018) have most frequently been examined. Another stream of literature also includes institutional factors such as the infrastructure, government spending, rule of law, corruption or shadow economy (e.g., Gorbunova et al. 2012;Chanegriha et al. 2017;Tintin 2013;Wach J. Risk Financial Manag. 2021,14, 56. https://doi.org/10.3390/jrfm14020056 https://www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2021,14, 56 2 of 12 and Wojciechowski 2016;Bailey 2018;Bilan et al. 2019) to the models of inward FDI determinants. With regard to the countries in transition, particularly those entering the European Union in the last few waves, special attention has been paid to the impact of this accession on the FDI flow and presence. That EU membership was an important anchor, notably for small Central European countries, was highlighted by Tintin (2013), who showed that EU membership itself significantly increased FDI inflows while reducing the impact of gross domestic product (GDP) size on these flows. Hence, EU membership can, to some extent, compensate for country size disadvantage, and consequently lead to attracting more FDI. Similar results regarding a positive association between EU membership and FDI inflows can also be found in works by Estrin and Uvalic (2014)orTokunaga and Iwasaki (2017). However, it is often unclear whether superior FDI inflows are the consequence of EU membership per se or higher institutional quality that is necessary for EU admission. Hence, we consider that policy stance and institutional environment, in particular factors like proinvestment policy and investment incentives and their forms, are slightly underexamined in the empirical literature. One important reason for this may be the limited availability of detailed data on the structure and amount of investment incentives. An exception in this regard is Slovakia, a Central European country that received a total FDI inflow of USD 51 billion in absolute terms in the period of 2003–2019. Many of these investments have been supported by a package of investment incentives provided by the government, the list of which is publicly available. However, there is insufficient evidence of the effects of these incentives on FDI inflows, especially when we take into account the fact that the incentive is often granted after the foreign investor ´ s localization decision is already adopted. Moreover, since the system of investment incentives varies across individual countries, it is reasonable to predict that the effects of investment promotion policy on the development of the particular country may also be country-specific. Hence, we pose the following research question: How do different forms of investment incentives affect foreign direct investment inflows and macroeconomic performance in a small open economy? The present paper aims to enrich the existing literature by evaluating the effects of fiscal and financial investment incentives on inward FDI (direct effect) and on selected macroeconomic variables (indirect effects) under the conditions in Slovakia. In addition, some studies (e.g., Ruane 2008) point to the fact that investment incentives can only have visible effects if they are accompanied by an overall friendly business environment. Hence, our study also examines the role of the level of business environment in attracting inward FDI and sustaining macroeconomic performance. The analysis covers the period of 2002–2019 and regression analysis was used as the primary methodology. The rest of the paper is organized as follows. Section 2reviews the literature connected with the effects of investment incentives on FDI inflows and other variables; Section 3 introduces the dataset and the empirical methodology; Section 4presents our empirical findings and their discussion, followed by the concluding remarks. 2. Literature Review The effects brought by investment incentives in the form of public subsidies are most frequently examined directly (i.e., on the basis of their ability to attract inward FDI). Since there are several examples that investment incentives have attracted significant foreign investments, especially in the case of transition countries, this aspect is reflected in the positive findings of the empirical literature. In the Czech context, it is generally stated that the provision of investment incentives is in most cases effective (Cedidlová2013) and positively related to the development of regions (Hlaváˇcek and Janáˇcek 2019). Similarly, in the Slovak context, investment incentives are considered as a basic tool to support foreign investment activities (Fabuš and Csabay 2018). However, this conclusion seems to require stronger empirical underpinning. When comparing Central European and Baltic countries, the results of the study by Šimelytéand Liuˇcvaitiené(2012) favor the first group of countries, since their combination of fiscal incentives, together with financial ones, attract J. Risk Financial Manag. 2021,14, 56 3 of 12 more FDI. The combination of the two policies for attracting FDI, namely the government ´ s immediate and certain lump-sum cost of the subsidy and tax rate reduction, as a possibly optimal investment promotion policy under certain circumstances, was also highlighted in the study by Tian (2018). However, Sarkar (2012) points to the interesting fact that governments provide financial investment incentives to companies and at the same time imposes taxes on their profits. When distinguishing particular forms of investment incentives, fiscal incentives, especially tax-related, are considered more important for attracting and benefiting from foreign direct investment (Edwards and Newton 2016) and thus have received significantly more attention in the literature, perhaps also due to availability of data regarding taxes. A study by Azémar and Desbordes (2010) highlighted the importance of fiscal incentives and deregulation of labor markets in attracting FDI. Results achieved by Van Van Parys and James (2010), on one hand, showed that reduced complexity of the tax system helped to attract FDI, however, the tax holidays, as one of the most popular fiscal incentives, had no robust positive relationship to FDI. More recent studies show similar ambiguities. ´ Slusarczyk (2018) concluded that the tax incentives provided by the Polish government are considered to be a crucial factor in influencing the decision of foreign investors to allocate their investments to Poland. On the other hand, Hsu et al. (2019) provided a rationale for the termination of the tax incentives in China, since they proved that these incentives were not a sufficient determining factor of inward FDI. In addition to the direct effects of investment incentives associated with an increase in inward foreign direct investment, other indirect effects are also expected, leading to increased productivity and the creation of new jobs, which should in turn lead to economic welfare and prosperity. However, the findings in this regard are rather ambiguous. The estimation results obtained by Yanikkaya and Karaboga (2017) showed that investment incentives had a negative or, at best, no positive effect on the selected macroeconomic variables. Although Musil and Hedija (2020)—only on a basis of a correlation analysis— demonstrated a statistically significant positive relationship between investment incentives and GDP growth, they also pointed to a non-statistically significant relationship between investment incentives and the output gap. Thus, they generally concluded that the investment promotion policy did not react flexibly to the current needs of the Czech economy. However, similar or possibly more detailed study conducted in the Slovak context is missing in the existing literature. Investment incentives per se are thus often questioned as an effective tool for attracting FDI. As indicated by Havránek and Iršová(2010), the governments of host countries often use investment incentives as a tool addressed to foreign investors in order to compensate for shortcomings such as the existence of a high burden of employment costs and/or insufficient labor productivity in the host country. In a similar sense, a review study by Munongo et al. (2017) concluded that most of the empirical studies that they had explored suggested a combination of incentives with other factors such as macroeconomic conditions, infrastructure, and transparent institutions in an effort to effectively attract FDI. Similarly, a meta-analytic review by Bailey (2018) concluded that “good government” attracts FDI. However, governments that successfully attract foreign direct investment provide, in addition to various forms of investment incentives, at least a stable political environment with predictable and reliable public institutions that allow foreign investors to reap country-specific benefits. Hence, investment incentives can be considered effective only in cases where the business environment of the host country is considered satisfactory. The outlined controversies and literature gaps led us to investigate the issue in more detail by considering the direct and indirect effects of different forms of investment incentives as well as the quality level of the overall business environment, under the conditions of a small open economy. On a basis of the literature review, we hypothesize that investment incentives effect FDI inflows and macroeconomic performance, however, the magnitude and the strength of the relationship between particular forms of investment J. Risk Financial Manag. 2021,14, 56 4 of 12 incentives on one hand, and their direct and indirect effects on the other hand, might be different. 3. Data and Methodology Inspired by the review study by Liou (2012), which analyzed the successes of incentive policies in attracting FDI and increasing economic growth, in our study, we evaluated similar effects of investment incentives provided by the Slovak government in the period of 2002–2019. More specifically, the aim of our research was to examine the effects of fiscal and financial investment incentives as well as the level of business environment on the inward FDI (direct effect) and on the selected macroeconomic variables (indirect effects). To study the effects of investment incentives and other variables, we followed the approach by Agu et al. (2015) by using an ordinary least square (OLS) technique in a multiple form and decomposition of investment incentives into particular components (forms). Following this, regression models were constructed to study the direct effects of investment incentives and other variables. FDIt=β0+β1logFisIIt−1+β2logFinIIt−1+β3GDPGRt−1+β4IEFt−1+εt(1) FDIt=β0+β1logFisIIt−1+β2logFinIIt−1+β3GDPGRt−1+εt(2) As the dependent variable, the total volume of foreign direct investment inflow (FDI) was used. Data on FDI inflow were taken from the World Bank database. As independent variables, the total volume of fiscal investment incentives (FisII) as well as financial investment incentives (FinII) provided in individual years were used. Data on provided investment incentives in the structure of fiscal and financial incentives were calculated according to the data given in the list of entities to which investment incentives were provided, as published by the Ministry of Economy of the Slovak Republic. The level of economic growth was expressed by the growth of GDP (GDPGR) based on the data published by the Statistical Office of the Slovak Republic. In addition, the quality of overall business environment in the country was measured through the Index of Economic Freedom (IEF). When using the index, higher values are associated with a higher level of economic freedom. Data on the Index of Economic Freedom were taken from the Heritage Foundation. Regression models were constructed to study the indirect effects of investment incentives and other variables. GDPt=β0+β1logFisIIt−1+β2logFinIIt−1+β3FDIt−1+β4IEFt−1+β5URt−1+β6Waget−1+εt(3) URt=β0+β1logFisIIt−1+β2logFinIIt−1+β3FDIt−1+β4IEFt−1+β5logGDPt−1+β6Waget−1+εt(4) Waget=β0+β1logFisIIt−1+β2logFinIIt−1+β3FDIt−1+β4IEFt−1+β5logGDPt−1+β6URt−1+εt(5) where the dependent variables used were the volume of GDP (GDP), unemployment rate (UR), and level of average nominal monthly wage (Wage). The input data were taken from the Statistical Office of the Slovak Republic. As independent variables, besides those in models (1) and (2), we also used the volume of inward FDI (FDI), the volume of GDP (GDP), unemployment rate (UR), and the level of average nominal monthly wage (Wage). In models (1)–(5), all the independent variables were used with a one-year lag (similar to the study by(Bevan and Estrin 2004), since we expected a delay in the effect of independent variables on attracting foreign investors and influencing macroeconomic conditions. Since volumes of investment incentives are in absolute numbers and based on summary statistics are skewed to the right, we followed the suggestion of Osborne (2002) and applied logarithmic transformation of these data. Descriptive statistics of the aforementioned variables are provided in Table 1, and the correlation matrix in Table 2. Pearson correlation coefficients were used in the correlation matrix. In addition to coefficients estimated in the OLS regressions, we also conducted R 2 , R2adj, Durbin-Watson, and Granger tests. Calculations were conducted in IBM SPSS 22. J. Risk Financial Manag. 2021,14, 56 5 of 12 Table 1. Descriptive statistics. Range Minimum Maximum Mean Std. Deviation Skewness Kurtosis FisII 206,950,023.00 0.00 206,950,023.00 50,981,809.2778 51,962,797.98420 1.781 3.772 FinII 241,028,314.00 0.00 241,028,314.00 55,763,398.9444 68,574,438.88813 1.517 1.751 FDI 6,064,345,209.70 − 362,908,482.70 5,701,436,727.00 3,061,536,539.4556 1,801,485,985.58198 −0.183 −1.181 IEF 11.00 59.00 70.00 66.6722 3.20511 −1.249 1.343 UR 12.80 5.80 18.60 12.6167 3.74468 −0.181 −0.591 Wage 643.52 448.48 1092.00 760.4989 181.31333 −0.098 −0.600 GDP 56,841.70 37,329.50 94171.20 67,787.6333 16,238.34690 −0.383 −0.581 GDPGR 16.30 −5.50 10.80 3.9722 3.42049 −0.765 3.045 The correlation matrix of the used variables is presented in Table 2. Table 2. Correlation matrix. FisII FinII FDI IEF UR Wage GDP GDPGR FisII 1 0.349 0.222 0.301 0.021 −0.076 −0.031 0.240 FinII 0.349 1 0.200 −0.048 0.280 −0.369 −0.350 0.370 FDI 0.222 0.200 1 0.222 −0.042 −0.246 −0.211 0.465 IEF 0.301 −0.048 0.222 1 −0.335 0.314 0.379 −0.025 UR 0.021 0.280 −0.042 −0.335 1 −0.868 ** −0.878 ** 0.157 Wage −0.076 −0.369 −0.246 0.314 −0.868 ** 1 0.993 ** −0.367 GDP −0.031 −0.350 −0.211 0.379 −0.878 ** 0.993 ** 1 −0.316 GDPGR 0.240 0.370 0.465 −0.025 0.157 −0.367 −0.316 1 Note: The asterisks denote the statistical significance of coefficients at a level of 1% (**), based on p-values. 4. Results and Discussion Slovakia is a small open Central European country that has undergone a process of economic transformation within which foreign investment presence is considered to play a crucial role. However, other Central European countries have also embarked on a comparable systematic economic transformation, relying on similar comparative advantages such as favorable geographic location, relatively low labor costs and high labor productivity, stable political environment, etc. Hence, an individually determined system of investment incentives has often become a decisive factor in attracting foreign investment. Examples of investment projects that initially considered all the Central European countries as appropriate locations, however, based on the provision of a generous package of investment incentives were finally allocated in Slovakia, are the investments of PSA Peugeot Citroën or KIA. The structure and conditions for the provision of investment incentives are slightly different within Central European countries, since they can be considered as a tool of competitive struggle in attracting FDI. For Hungary, besides standard cash subsidies, tax incentives, low-interest loans, or land available for free or at reduced prices, special VIP subsidies and strategic agreements individually negotiated with the Hungarian government are typical. In addition, Poland has also established administratively separate Special Economic Zones with rich investment incentives and preferential terms designed mainly for foreign investors. However, detailed data on the volume and structure of investment incentives in these countries are not available. The most similar investment incentive schemes are applied in the Czech Republic and Slovakia, basically distinguishing fiscal and financial incentives. Figure 1provides a comparison of the development of the total volume of provided investment incentives in these countries for the period of 2002–2019. A more detailed comparison of the structure of investment incentives was not possible due to the unavailability of detailed data for the Czech Republic. J. Risk Financial Manag. 2021,14, 56 6 of 12 J. Risk Financial Manag. 2021, 14, x FOR PEER REVIEW 6 of 12 mainly for foreign investors. However, detailed data on the volume and structure of investment incentives in these countries are not available. The most similar investment incentive schemes are applied in the Czech Republic and Slovakia, basically distinguishing fiscal and financial incentives. Figure 1 provides a comparison of the development of the total volume of provided investment incentives in these countries for the period of 2002–2019. A more detailed comparison of the structure of investment incentives was not possible due to the unavailability of detailed data for the Czech Republic. Figure 1. Development of the total volume of provided investment incentives in Slovakia and the Czech Republic. Source: Own processing based on data from Ministry of Economy of the Slovak Republic and www.czechinvest.org. Figure 1 shows that the amount of provided investment incentives was significantly higher in the Czech Republic, especially in the first half of the reported period. Even if we take into account the fact that the Czech Republic is approximately two times bigger than Slovakia in terms of population size, the difference in the amount of provided investment incentives was still significant. While in the Czech Republic the total amount of €7.5 billion was provided for investment incentives in the observed period, in the Slovak Republic, it was less than €2 billion. A similar disparity is evident in terms of the number of supported projects as the ratio was 926 Czech projects to 213 Slovak projects. However, while more than 85% of supported projects were implemented by foreign investors in Slovakia, in the Czech Republic, it was only about 43%. Thus, it appears that Slovakia is concentrating more on supporting foreign investment compared to domestic ones. Under the conditions of the Slovak Republic, two basic forms of investment incentives are usually provided by the government: financial incentives in the form of grants for tangible and intangible fixed assets as well as contributions for new jobs creation, and fiscal incentives in the form of corporate income tax relief. The preference of the particular form of investment incentive is not defined in the legislation; however, there are precise conditions that shall be fulfilled for provision of the particular form of incentives. In practice, the majority of investment projects (54%) receive a package of investment incentives consisting of at least two forms, combining fiscal and financial incentives. The potentially supported projects should fall into one of the defined categories, namely an industrial production, a technology center, a combination of industrial production, and a technology center and a business services center. Figure 2 shows the development of the provided investment incentives across the whole monitored period from 2002 to 2019 including the structure as well as the number of approved applications. 0 200,000,000 400,000,000 600,000,000 800,000,000 1,000,000,000 1,200,000,000 1,400,000,000 1,600,000,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Slovakia The Czech Republic Figure 1. Development of the total volume of provided investment incentives in Slovakia and the Czech Republic. Source: Own processing based on data from Ministry of Economy of the Slovak Republic and www.czechinvest.org. Figure 1shows that the amount of provided investment incentives was significantly higher in the Czech Republic, especially in the first half of the reported period. Even if we take into account the fact that the Czech Republic is approximately two times bigger than Slovakia in terms of population size, the difference in the amount of provided investment incentives was still significant. While in the Czech Republic the total amount of € 7.5 billion was provided for investment incentives in the observed period, in the Slovak Republic, it was less than € 2 billion. A similar disparity is evident in terms of the number of supported projects as the ratio was 926 Czech projects to 213 Slovak projects. However, while more than 85% of supported projects were implemented by foreign investors in Slovakia, in the Czech Republic, it was only about 43%. Thus, it appears that Slovakia is concentrating more on supporting foreign investment compared to domestic ones. Under the conditions of the Slovak Republic, two basic forms of investment incentives are usually provided by the government: financial incentives in the form of grants for tangible and intangible fixed assets as well as contributions for new jobs creation, and fiscal incentives in the form of corporate income tax relief. The preference of the particular form of investment incentive is not defined in the legislation; however, there are precise conditions that shall be fulfilled for provision of the particular form of incentives. In practice, the majority of investment projects (54%) receive a package of investment incentives consisting of at least two forms, combining fiscal and financial incentives. The potentially supported projects should fall into one of the defined categories, namely an industrial production, a technology center, a combination of industrial production, and a technology center and a business services center. Figure 2shows the development of the provided investment incentives across the whole monitored period from 2002 to 2019 including the structure as well as the number of approved applications. J. Risk Financial Manag. 2021,14, 56 7 of 12 J. Risk Financial Manag. 2021, 14, x FOR PEER REVIEW 7 of 12 Figure 2. Development of provided investment incentives in Slovakia. Source: Own processing based on data from Ministry of Economy of the Slovak Republic. Due to significant changes in legislation, the provision of investment incentives can be assessed in two basic periods, before and after 2007. In the first observed period (i.e., 2002–2007), a total of 84 applications for investment incentives in the total amount of €1040 million were approved. Almost 60% of this amount was provided in the form of financial incentives and the rest as corporate income tax relief. In the second observed period (i.e., 2008–2019), a total of 129 applications for investment incentives in the total amount of almost €928 million were approved. Compared to the previous period, more investment projects were supported, but the total amount of provided investment incentives was lower, which means that smaller investment projects were supported, especially in marginalized regions. In terms of the structure of investment incentives, the ratio between financial and fiscal stimuli changed significantly compared to the previous period. The government began to prefer fiscal incentives with less immediate impact on the state budget, which was reflected in the share of fiscal incentives on the total amount of investment incentives of almost 58%. The descriptive statistics of all the variables used within our analysis is provided in Table 1. With regard to the ratio of the particular forms of investment incentives during the whole observed period, the average values showed that a slightly higher amount was provided in the form of financial investment incentives. The average inflow of FDI to Slovakia was positive and reached an amount slightly exceeding USD 3 billion. In terms of the level of economic freedom, the country reported an average score of 66.67 points and moved around the 60a place in the ranking of the Heritage Foundation. From the selected macroeconomic variables point of view, Slovakia reported a relatively high unemployment rate of 12.6%, relatively low average nominal monthly wage of €760, and the GDP growth reached an average level of 3.9 percent in the observed period. Within our research, our interest was to more deeply study the direct and indirect effects associated with the provision of particular forms of investment incentives. The empirical results of model (1) and model (2) (i.e., showing the direct effects of investment incentives and other variables including level of economic freedom in Slovakia on FDI inflows) are shown in Table 3. 0 10 20 30 40 50 60 0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 350,000,000 400,000,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 No. of approved applications Investment aid total (Eur) Fiscal investment aid (Eur) Financial investment aid (Eur) Figure 2. Development of provided investment incentives in Slovakia. Source: Own processing based on data from Ministry of Economy of the Slovak Republic. Due to significant changes in legislation, the provision of investment incentives can be assessed in two basic periods, before and after 2007. In the first observed period (i.e., 2002–2007), a total of 84 applications for investment incentives in the total amount of € 1040 million were approved. Almost 60% of this amount was provided in the form of financial incentives and the rest as corporate income tax relief. In the second observed period (i.e., 2008–2019), a total of 129 applications for investment incentives in the total amount of almost € 928 million were approved. Compared to the previous period, more investment projects were supported, but the total amount of provided investment incentives was lower, which means that smaller investment projects were supported, especially in marginalized regions. In terms of the structure of investment incentives, the ratio between financial and fiscal stimuli changed significantly compared to the previous period. The government began to prefer fiscal incentives with less immediate impact on the state budget, which was reflected in the share of fiscal incentives on the total amount of investment incentives of almost 58%. The descriptive statistics of all the variables used within our analysis is provided in Table 1. With regard to the ratio of the particular forms of investment incentives during the whole observed period, the average values showed that a slightly higher amount was provided in the form of financial investment incentives. The average inflow of FDI to Slovakia was positive and reached an amount slightly exceeding USD 3 billion. In terms of the level of economic freedom, the country reported an average score of 66.67 points and moved around the 60 a place in the ranking of the Heritage Foundation. From the selected macroeconomic variables point of view, Slovakia reported a relatively high unemployment rate of 12.6%, relatively low average nominal monthly wage of € 760, and the GDP growth reached an average level of 3.9 percent in the observed period. Within our research, our interest was to more deeply study the direct and indirect effects associated with the provision of particular forms of investment incentives. The empirical results of model (1) and model (2) (i.e., showing the direct effects of investment incentives and other variables including level of economic freedom in Slovakia on FDI inflows) are shown in Table 3. J. Risk Financial Manag. 2021,14, 56 8 of 12 Table 3. Regression results of models (1)–(2). Variable Model (1) Model (2) Constant 4,574,043,665.940 (0.620) 4,191,869,255.855 ** (2.981) logFisII −572,785,105.569 ** (−2.621) −571,430,387.438 ** (−2.740) logFinII 139,807,022.215 * (2.182) 302,838,401.426 ** (2.369) GDPGR 242,584,136.357 ** (2.451) 242,940,018.348 ** (2.561) IEF −5,771,047.605 (−0.053) R20.589 0.588 adjusted R20.451 0.493 Durbin-Watson test 2.243 2.244 Granger test 0.047 0.018 Note: t-statistics in parentheses. The asterisks denote statistical significance: * at a level of 10% and ** at a level of 5%. Fiscal and financial investment incentives and GDP growth have a significant impact on FDI inflows in the following year, though the impact of fiscal investment incentives is negative. If a bivariate analysis was performed, directions of the relationships would remain the same, but the fiscal nor financial investment incentives alone would not be significant. The Table 4further reports empirical results of the models (3)–(5), i.e., showing indirect effects of investment incentives and other variables on the selected macroeconomic variables. Table 4. Regression results of models (3)–(5). Variable Model (3) Model (4) Model (5) Constant 2622.125 (0.150) 88.457 (0.548) −6029.378 *** (−7.515) logFisII −120.196 (−0.306) 0.387 (1.220) −5.394 (−1.116) logFinII 202.430 (0.779) −0.234 (−1.193) 2.538 (0.803) FDI 3.474 ×10−7 (0.815) −7.723 ×10−10 ** (−2.716) 2.392 ×10−9 (0.454) IEF 28.589 (0.126) 0.279 (0.861) −13.858 *** (−4.232) UR −60.428 (−0.152) −3.492 (−0.709) Wage 86.832 *** (10.259) −0.010 (−0.388) logGDP −18.031 (−0.439) 1620.875 *** (9.212) R20.983 0.818 0.981 adjusted R20.973 0.708 0.969 Durbin−Watson test 1.961 1.253 2.190 Granger test 0.501 0.627 0.220 Note: t-statistics in parentheses. The asterisks denote statistical significance: ** on a level of 5% and *** on a level of 1%.