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On the Causal Links Between FDI and Growth in Developing Countries

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Author Info
Henrik Hansen
John Rand

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Abstract

We analyse the Granger causal relationships between foreign direct investment (FDI) and GDP in a sample of 31 developing countries covering 31 years. Using estimators for heterogeneous panel data we find bi-directional causality between the FDI-to-GDP ratio and the level of GDP. FDI has a lasting impact on GDP, while GDP has no long-run impact on the FDI-to-GDP ratio. In that sense FDI causes growth. Furthermore, in a model for GDP and FDI as a fraction of gross capital formation (GCF) we also find long-run effects from FDI to GDP. This finding may be interpreted as evidence in favour of the hypotheses that FDI has an impact on GDP via knowledge transfers and adoption of new technology. Copyright United Nations University 2006.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9701.2006.00756.x
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Publisher Info
Article provided by Blackwell Publishing in its journal World Economy.

Volume (Year): 29 (2006)
Issue (Month): 1 (01)
Pages: 21-41
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Handle: RePEc:bla:worlde:v:29:y:2006:i:1:p:21-41

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  3. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July. [Downloadable!] (restricted)
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  4. 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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  5. Larsson, Rolf & Lyhagen, Johan & Löthgren, Mickael, 1998. "Likelihood-Based Cointegration Tests in Heterogeneous Panels," Working Paper Series in Economics and Finance 250, Stockholm School of Economics, revised 27 Aug 1998.
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  6. Hsiao, C. & Pesaran, M. H. & Tahmiscioglu, A. K., 1998. "Bayes Estimation of Short-run Coefficients in Dynamic Panel Data Models," Cambridge Working Papers in Economics 9804, Faculty of Economics, University of Cambridge.
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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. Narula, Rajneesh & Dunning, John H., 2009. "Multinational enterprises, development and globalisation: Some clarifications and a research agenda," UNU-MERIT Working Paper Series 023, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology. [Downloadable!]
  2. Erkan Erdil & I. Hakan Yetkiner, 2004. "A Panel Data Approach for Income-Health Causality," Working Papers FNU-47, Research unit Sustainability and Global Change, Hamburg University, revised Apr 2004. [Downloadable!]
  3. Burcu Türkcan & I. Hakan Yetkiner, 2008. "Endogenous Determination of FDI Growth and Economic Growth:The OECD Case," Working Papers 0807, Izmir University of Economics. [Downloadable!]
  4. Eva Rytter Sunesen, 2008. "A Mean-Variance Explanation of FDI Flows to Developing Countries," Discussion Papers 08-17, University of Copenhagen. Department of Economics. [Downloadable!]
  5. Vadlamannati, Krishna Chaitanya, 2008. "Do Elections Slow Down Economic Globalization Process In India? It’S Politics Stupid !," MPRA Paper 10139, University Library of Munich, Germany. [Downloadable!]
  6. Klasen, Stephan & Herzer, Dierk & Nowak-Lehmann Danzinger, Felicitas, 2007. "In search of FDI-led growth in developing countries," Proceedings of the German Development Economics Conference, Göttingen 2007 14, Verein für Socialpolitik, Research Committee Development Economics. [Downloadable!]
    Other versions:
  7. Sekmen, Fuat, 2007. "Cointegration and Causality among Foreign Direct Investment in Tourism Sector, GDP, and Exchange Rate Volatility in Turkey," MPRA Paper 8736, University Library of Munich, Germany. [Downloadable!]
  8. Asiedu, Elizabeth & Gyimah-Brempong, Kwabena, 2007. "Effect of the Liberalization of Investment Policies on Employment and Investment of Multinational Corporations in Africa," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  9. Burcu Türkcan & Alper Duman & I. Hakan Yetkiner, 2008. "How Does FDI and Economic Growth Affect Each Other? The OECD Case," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Proceedings of the Conference on Emerging Economic Issues in a Globalizing World, pages 21-40 Izmir University of Economics. [Downloadable!]
  10. Miet Maertens & Liesbeth Colen & Johan F.M. Swinnen, 2008. "Globalization and Poverty in Senegal: A Worst Case Scenario?," LICOS Discussion Papers 21708, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  11. Monnet Gbakou & Mustapha Sadni Jallab & René Sandretto, 2008. "Foreign Direct Investment, Macroeconomic Instability And Economic Growth in MENA Countries," Post-Print halshs-00303694_v1, HAL. [Downloadable!]
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  12. Bichaka Fayissa & Christian Nsiah & Badassa Tadasse, 2009. "Tourism and Economic Growth in Latin American Countries(LAC): Further Empirical Evidence," Working Papers 200902, Middle Tennessee State University, Department of Economics and Finance. [Downloadable!]
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