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Revisiting FDI-led growth hypothesis: the role of sector characteristics

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  • Feride Gönel
  • Tolga Aksoy

Abstract

Does foreign direct investment (FDI) lead to higher growth? What type of FDI really works? In this paper, we disaggregate FDIs based on their technological characteristics and investigate which kind of FDI leads to output growth. The results for the sample of OECD countries during the period 1985–2012 indicate that FDI inflows to Information and Communication Technologies (ICTs) using and producing manufacturing and service sectors (ICT-based), non-ICT using and producing manufacturing and service sectors (non-ICT-based) and other sectors (non-ICT-other) play no role in contributing to economic growth. However, we provide evidence that absorptive capacities of host countries work through ICT-based FDI inflows. Only if the host countries have sufficient level of human capital, financial resources and technological infrastructure, ICT-based FDI will foster economic growth. The results are robust to controlling missing values, studying the subsample of emerging market economies and consideration of endogeneity.

Suggested Citation

  • Feride Gönel & Tolga Aksoy, 2016. "Revisiting FDI-led growth hypothesis: the role of sector characteristics," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 25(8), pages 1144-1166, November.
    • Handle: RePEc:taf:jitecd:v:25:y:2016:i:8:p:1144-1166
    DOI: 10.1080/09638199.2016.1195431
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    References listed on IDEAS

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    1. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1-1.
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    2. Hui Wang & Xin Zhong, 2023. "An Empirical Study on the Impact of Chinese OFDI on the Global Value Chain Positions of Countries Along the Belt and Road and Threshold Effects," SAGE Open, , vol. 13(1), pages 21582440231, February.
    3. Arshad Hayat, 2019. "Foreign direct investments, institutional quality, and economic growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 28(5), pages 561-579, July.
    4. James Temitope Dada & Ezekiel Olamide Abanikanda, 2022. "The moderating effect of institutions in foreign direct investment led growth hypothesis in Nigeria," Economic Change and Restructuring, Springer, vol. 55(2), pages 903-929, May.
    5. Brahim Bergougui & Syed Mansoob Murshed, 2023. "Spillover effects of FDI inflows on output growth: An analysis of aggregate and disaggregated FDI inflows of 13 MENA economies," Australian Economic Papers, Wiley Blackwell, vol. 62(4), pages 668-692, December.
    6. Hayat, Arshad, 2016. "Foreign Direct Investment, Institutional Framework and Economic Growth," MPRA Paper 74563, University Library of Munich, Germany.
    7. Ferry Syarifuddin & Maman Setiawan, 2021. "Capital Flow Amid The Covid-19 Pandemic: Cross-Country Contagion Effect Among Asean5 And Projection Of The Impacts For The Indonesian Economy," Working Papers WP/08/2021, Bank Indonesia.
    8. Musa Abdullahi Sakanko & JAMES OBILIKWU & JOSEPH DAVID, 2020. "The Effect Of Aggregate Institutional Quality On Foreign Direct Investment In Nigeria: Evidence From Nardl," Economics & Law, Faculty of Economics, SOUTH-WEST UNIVERSITY "NEOFIT RILSKI", BLAGOEVGRAD, vol. 2(2), pages 1-13.
    9. Aneta Bobenič Hintošová & Glória Bódy, 2023. "Sustainable FDI in the Digital Economy," Sustainability, MDPI, vol. 15(14), pages 1-15, July.
    10. Ummya Salma & Md. Fazlul Huq Khan & Md. Masum Billah, 2023. "Foreign Capital and Economic Growth: Evidence from Bangladesh," Papers 2312.04695, arXiv.org.
    11. Shima’a Hanafy & Marcus Marktanner, 2019. "Sectoral FDI, absorptive capacity and economic growth – empirical evidence from Egyptian governorates," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 28(1), pages 57-81, January.
    12. Bibhuti Sarker & Farid Khan, 2020. "Nexus between foreign direct investment and economic growth in Bangladesh: an augmented autoregressive distributed lag bounds testing approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-18, December.
    13. Udi Joshua & David Babatunde & Samuel Asumadu Sarkodie, 2021. "Sustaining Economic Growth in Sub-Saharan Africa: Do FDI Inflows and External Debt Count?," JRFM, MDPI, vol. 14(4), pages 1-13, March.

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