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Foreign Direct Investment, Growth and Convergence Hypothesis: A Cross Country Analysis


  • Jawaid, Syed Tehseen
  • Raza, Syed Ali


This study investigates the relationship between foreign direct investment and economic growth by using seven years average annual data of 129 countries from the period of 2003 to 2009. Results indicate the significant positive relationships between foreign direct investment and economic growth in all countries, as well as in high, middle and low income countries. The foreign direct investment is contributing more in low income countries as compare to middle and high income countries. Results of unconditional convergence indicate that convergence exist in all, low, middle and high income countries. Results confirm that countries are coming together with respect to per capita income. Results of conditional convergence based on foreign direct investment suggest that the low and middle income countries are converging each other more rapidly. In high income countries the initial per capita income is remains negative and significant but the coefficient is almost similar in both conditional and unconditional models. This shows that chances of convergence in high income countries remain steady in the presence of foreign direct investment. On the other hand, in all countries model, coefficient is almost 60 percent higher in conditional model as compare to unconditional model. This indicates that with the existence of foreign direct investment, the overall countries are converging with the higher rate. In the light of above argument we can suggest to host country’s to make unproblematic policies to attract foreign direct investment to make efficient utilization of resources and, reduce output gap in the country.

Suggested Citation

  • Jawaid, Syed Tehseen & Raza, Syed Ali, 2012. "Foreign Direct Investment, Growth and Convergence Hypothesis: A Cross Country Analysis," MPRA Paper 39000, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39000

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    References listed on IDEAS

    1. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522543, January.
    2. Yanikkaya, Halit, 2003. "Trade openness and economic growth: a cross-country empirical investigation," Journal of Development Economics, Elsevier, vol. 72(1), pages 57-89, October.
    3. Balamurali, N. & Bogahawatte, C., 2004. "Foreign Direct Investment and Economic Growth in Sri Lanka," Sri Lankan Journal of Agricultural Economics, Sri Lanka Agricultural Economics Association (SAEA), vol. 6.
    4. Tiwari, Aviral & Mutascu, Mihai, 2010. "Economic growth and and FDI in ASIA: A panel data approach," MPRA Paper 28172, University Library of Munich, Germany.
    5. Syed Jawaid & Abdul Waheed, 2011. "Effects of Terms of Trade and its Volatility on Economic Growth: A Cross Country Empirical Investigation," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(2), pages 217-229, December.
    6. Nenad Stanisic, 2008. "Do Foreign Direct Investments Increase the Economic Growth of Southeastern European Transition Economies?," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 6(1), pages 29-38.
    7. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-963, September.
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    9. Kamal Upadhyaya & Gyan Pradhan & Dharmendra Dhakal & Rabindra Bhandari, 2007. "Foreign Aid, FDI and Economic Growth in East European Countries," Economics Bulletin, AccessEcon, vol. 6(13), pages 1-9.
    10. 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.
    11. Adams, Samuel, 2009. "Foreign Direct investment, domestic investment, and economic growth in Sub-Saharan Africa," Journal of Policy Modeling, Elsevier, vol. 31(6), pages 939-949, November.
    12. Archanun Kohpaiboon, 2003. "Foreign trade regimes and the FDI-Growth Nexus: a case study of Thailand," Journal of Development Studies, Taylor & Francis Journals, vol. 40(2), pages 55-69.
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    More about this item


    Foreign Direct Investment; Economic Growth; Cross Country Analysis;

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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