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The Elusive Link Between FDI and Economic Growth

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  • Bénétrix,Agustín
  • Pallan,Hayley Marie
  • Panizza,Ugo G.

Abstract

This paper revisits the link between FDI and economic growth in emerging and developingeconomies. Analysis of the early decades of the sample shows that there is no statistically significant correlationbetween FDI and growth for countries with average levels of education or financial depth. In line with previouscontributions, this correlation is positive and statistically significant for countries with sufficientlywell-developed financial sectors or high levels of human capital. However, the findings also show that the linkbetween FDI and growth varies over time. For more recent periods, there is a positive and statistically significantrelationship between FDI and growth for the average country, with local conditions having a negative effect on this link.The paper also develops a novel instrument aimed at addressing the endogeneity of FDI inflows. Instrumentalvariable estimates suggest that the results are unlikely to be driven by endogeneity, and the results on the role ofabsorptive capacities may be due to the GVC revolution in the 1990s.

Suggested Citation

  • Bénétrix,Agustín & Pallan,Hayley Marie & Panizza,Ugo G., 2023. "The Elusive Link Between FDI and Economic Growth," Policy Research Working Paper Series 10422, The World Bank.
    • Handle: RePEc:wbk:wbrwps:10422
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    More about this item

    JEL classification:

    • 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
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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