Despite the fact that previous studies have extensively investigated the foreign direct investment (FDI)-growth nexus, those studies have not considered the role of terms of trade as a proxy for international competitiveness and structural changes. This paper investigates the causal nexus between FDI, growth, and terms of trade volatility (TOTV) in Estonia, Latvia, and Lithuania by constructing a vector autoregression model. On the basis of the Granger non-causality procedure developed by Toda and Yamamoto (J Econom 66:225-250, 1995) and Yamada and Toda (J Econom 86:55-95, 1998), the results show that the causality is bidirectional between FDI and growth in Estonia and unidirectional (running from FDI to growth) in Latvia and Lithuania. The results also confirm causal linkages between FDI and TOTV in the sample countries. The policy implication of these results is that, by promoting growth and structural reforms, the recipient countries can encourage FDI inflows and, this in turn, can affect growth. In addition, multinationals' activities and TOTV show the presence of a feedback between these two variables.
Foreign direct investment Causality Baltic countries Economic growth Terms of trade volatility Structural changes