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FDI and economic growth: the role of natural resources?

Author

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  • Arshad Hayat

Abstract

Purpose - The purpose of this paper is to investigate the foreign direct investments (FDI)-growth nexus and the impact of natural resource abundance in the host country on the FDI-growth nexus. Design/methodology/approach - For a large data set of 104 countries for the period 1996-2015, Arellano and Bond’s GMM estimation method is applied to investigate the impact of FDI inflow on economic growth and the role of the natural resource sector on the FDI-growth relationship. Findings - The paper found a positive and significant effect of FDI inflows on economic growth of the host country. However, the impact of FDI inflows on economic growth changes with the changes in the size of the natural resource sector. The estimated positive impact of FDI inflows on economic growth declines with the expansion in the size of natural resources. Beyond a certain limit, a further expansion in the size of natural resource sector will lead to a negative effect of FDI on economic growth. Research limitations/implications - The paper found a positive and significant impact of FDI inflows on economic growth of the host country. However, the impact of FDI inflows on economic growth changes with the changes in the size of the natural resource sector. The estimated positive impact of FDI inflows on economic growth declines with the expansion in the size of the natural resources. Beyond a certain limit, a further expansion in the size of the natural resource sector will lead to a negative effect of FDI on economic growth. The same analysis is repeated for groups of countries divided into different income groups. FDI inflows are found to have significant growth enhancing role in all three groups of countries. However, FDI inflows-induced growth was found to be more pronounced in the middle- and low-income countries compared to high-income countries. Further, FDI-induced economic growth is slowed down in low-income and middle-income countries by the increase in size of the natural resource sector. While in high-income countries, the size of the natural resource sector has no significant role on the FDI-growth nexus. Practical implications - While countries use their natural resource sector as an instrument to attract FDI into the countries, low- and middle-income countries face the dilemma of experiencing the resource curse in the form of watered down FDI-induced growth. Therefore, low- and middle-income countries need to try at the same time to attract FDI into the non-resources sector to keep the relative size of the natural resource sector low as to avoid hampering the FDI-induced economic growth. High-income countries, on the other hand, do not experience the FDI-induced growth hampering impact of the natural resource sector. Therefore, high-income countries should attract FDI into the countries regardless of the sector attracting the foreign investments. Originality/value - The paper is part of the author’s PhD research and is an original contribution.

Suggested Citation

  • Arshad Hayat, 2018. "FDI and economic growth: the role of natural resources?," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 45(2), pages 283-295, May.
    • Handle: RePEc:eme:jespps:jes-05-2015-0082
    DOI: 10.1108/JES-05-2015-0082
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    Cited by:

    1. hayat, arshad, 2017. "FDI and economic growth: Evidence on the Role of the Size of Natural Resource Sector," MPRA Paper 76205, University Library of Munich, Germany.
    2. Marvellous Ngundu & Nicholas Ngepah, 2020. "Comparative Effects of Foreign Direct Investment from China and Other Sources on Africa’s Economic Growth," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(4), pages 382-408, November.
    3. Adeleye Ebenezer OLONILUYI & Julius Oyebanji IBITOYE & Adegbola OJAROTADE, 2025. "Foreign Direct Investment, Technological Gap and Total Factor Productivity in Sub-Saharan African Economies," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 9(4), pages 3963-3972, April.
    4. Sinem Kilic Celik & M. Ayhan Kose & Franziska Ohnsorge & F. Ulrich Ruch, 2023. "Potential Growth: A Global Database," CAMA Working Papers 2023-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. Sharofiddin Ashurov & Anwar Hasan Abdullah Othman & Romzie Bin Rosman & Razali Bin Haron, 2020. "The determinants of foreign direct investment in Central Asian region: A case study of Tajikistan, Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan (A quantitative analysis using GMM)," Russian Journal of Economics, ARPHA Platform, vol. 6(2), pages 162-176, June.
    6. Oro, Oro Ufuo & Alagidede, Imoptep Paul, 2021. "Does petroleum resources or market size drive foreign direct investment in Africa? New evidence from time-series analysis," Resources Policy, Elsevier, vol. 71(C).
    7. Kodjo N’Souvi & Chen Sun & Badoubatoba Mathieu DISSANI & Folly Dovénam YOVODEVI, 2021. "Impact of Chinese Foreign Direct Investment on the growth of West African Economic and Monetary Union (WAEMU) countries," Journal of Scientific Reports, IJSAB International, vol. 3(1), pages 9-25.
    8. Li, Yurog & Cong, Zhenglong & Xie, Yufan & Wang, Yan & Wang, Hongmei, 2022. "The relationship between green finance, economic factors, geopolitical risk and natural resources commodity prices: Evidence from five most natural resources holding countries," Resources Policy, Elsevier, vol. 78(C).
    9. ATM Omor Faruq, 2023. "The Determinants of Foreign Direct Investment (FDI) A Panel Data Analysis for the Emerging Asian Economies," Papers 2307.07037, arXiv.org.
    10. Addis Yimer, 2023. "When does FDI make a difference for growth? A comparative analysis of resource‐rich and resource‐scarce African economies," International Finance, Wiley Blackwell, vol. 26(1), pages 82-110, April.
    11. Noor Azryani Auzairy & Cheong Chooi Mei & Chen Si Min & Rifqi Maulida, 2018. "How Sustainable is the Foreign Direct Investment? In the Case of Malaysia," International Journal of Asian Social Science, Asian Economic and Social Society, vol. 8(11), pages 1027-1038, November.
    12. Tan, Qingmei & Yasmeen, Humaira & Ali, Sharafat & Ismail, Hina & Zameer, Hashim, 2023. "Fintech development, renewable energy consumption, government effectiveness and management of natural resources along the belt and road countries," Resources Policy, Elsevier, vol. 80(C).
    13. Hieu Thanh Nguyen & Hiep Ngoc Luu & Ngoc Ha Do, 2021. "The dynamic relationship between greenfield investments, cross-border M&As, domestic investment and economic growth in Vietnam," Economic Change and Restructuring, Springer, vol. 54(4), pages 1065-1089, November.
    14. Muhammad Asif & Abdul Majid, 2018. "Institutional quality, natural resources and FDI: empirical evidence from Pakistan," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 8(4), pages 391-407, December.
    15. Hayat, Arshad & Cahlik, Tomas, 2017. "FDI, natural resource and economic growth: A Threshold model approach," MPRA Paper 100271, University Library of Munich, Germany.
    16. Wu, Sihong & Huang, Xinli & Fan, Di & Su, Yiyi & Li, Yongjian, 2023. "Cluster linkages in the global production networks: Exploring the impacts on the expansion of emerging market multinationals," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 171(C).
    17. Hayat, Arshad & Cahlik, Tomas, 2017. "FDI and Economic Growth: A Changing Relationship Across Country and Overtime," MPRA Paper 78240, University Library of Munich, Germany.
    18. Tong, Tong & Chen, Xiaoyue & Singh, Tarlok & Li, Bin, 2022. "Corporate governance and the outward foreign direct investment: Firm-level evidence from China," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 962-980.
    19. Asif, Muhammad & Khan, Khan Burhan & Anser, Muhammad Khalid & Nassani, Abdelmohsen A. & Abro, Muhammad Moinuddin Qazi & Zaman, Khalid, 2020. "Dynamic interaction between financial development and natural resources: Evaluating the ‘Resource curse’ hypothesis," Resources Policy, Elsevier, vol. 65(C).
    20. Mohammad Ajmal Hameed & Mohammad Mafizur Rahman & Rasheda Khanam, 2022. "Assessing the asymmetric war-growth nexus: A case of Afghanistan," PLOS ONE, Public Library of Science, vol. 17(8), pages 1-24, August.

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    Keywords

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    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General

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