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Foreign Direct Investment and Economic Growth: A Cross-Country Analysis

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Author Info
Mariam Khawar (Assistant Professor of Economics, Elmira College)

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Abstract

It is generally acknowledged that domestic investment boosts economic growth, yet the impact of foreign direct investment (FDI) is not as clear, with some studies suggesting the need for a miniumum threshold level of development in order for FDI to be beneficial. In this paper we conduct an empirical cross-country growth analysis to investigate the impact over two decades, of foreign direct investment at the 'aggregate' level, and find that it has a significant and positive relationship with real income per capita, irrespective of any human capital requirements. An interesting observation is that the coefficient on the foreign investment variable is considerably larger than that of the domestic investment variable, suggesting a potentially large role for FDI. However, the problem of establishing the direction of causality, compounded by the unavailability of suitable instrumental variables, remains. Thus, at this point, we go no further than concluding that there is indeed, a large and positive relationship between foreign direct investment and economic growth.

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Publisher Info
Article provided by International Trade and Finance Association in its journal Global Economy Journal.

Volume (Year): 5 (2007)
Issue (Month): 1 ()
Pages: 8
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Handle: RePEc:bep:glecon:5:2007:1:8

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Related research
Keywords: Foreign Direct Investment Economic Growth Cross-Country Empirical Multinational Corporations Developing Countries

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gregory Mankiw, 1995. "The Growth of Nations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-1), pages 275-326. [Downloadable!]
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  2. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October. [Downloadable!] (restricted)
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  3. Minsoo Lee & MoonJoong Tcha, 2004. "The color of money: The effects of foreign direct investment on economic growth in transition economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(2), pages 211-229, June. [Downloadable!] (restricted)
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  4. Hermes, Niels & Lensink, Robert, 2000. "Foreign direct investment, financial development and economic growth," Research Report 00E27, University of Groningen, Research Institute SOM (Systems, Organisations and Management). [Downloadable!]
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  5. Joze Mencinger, 2003. "Does Foreign Direct Investment Always Enhance Economic Growth?," Kyklos, Blackwell Publishing, vol. 56(4), pages 491-508, November. [Downloadable!] (restricted)
  6. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David Mayer-Foulkes, 2005. "Development and Underdevelopment in the Globalizing Economy," DEGIT Conference Papers c010_005, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
  2. Gang Xu & Ruifang Wang, 2007. "The Effect of Foreign Direct Investment on Domestic Capital Formation, Trade, and Economic Growth in a Transition Economy: Evidence from China," Global Economy Journal, International Trade and Finance Association, vol. 7(2), pages 1. [Downloadable!]
  3. Hartmut Egger & Peter Egger & Josef Falkinger & Volker Grossmann, 2005. "International Capital Market Integration, Educational Choice and Economic Growth," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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