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On the Causal Links between FDI and Growth in Developing Countries

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  • Henrik Hansen
  • John Rand

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.

Suggested Citation

  • Henrik Hansen & John Rand, 2005. "On the Causal Links between FDI and Growth in Developing Countries," WIDER Working Paper Series RP2005-31, World Institute for Development Economic Research (UNU-WIDER).
    • Handle: RePEc:unu:wpaper:rp2005-31
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    More about this item

    Keywords

    Econometric models (Economic development); Foreign investments;

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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