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Revisiting the Effect of FDI on Economic Growth using Quantile Regression

Author

Listed:
  • Lijuan Huo

    (Beijing Institute of Technology)

  • Tae-Hwan Kim

    (Yonsei University)

  • Yunmi Kim

    (University of Seoul)

Abstract

Numerous empirical studies preset strong evidence supporting the positive relationship between Foreign Direct Investment (FDI) and the host countries¡¯ economic growth. Unlike most papers investigating this relationship using least squares-based regression, we analyze the effect of FDI on economic growth using quantile regression (QR). In this paper, we attempt to (i) reduce the omitted variable bias, (ii) solve the potential endogeneity problem of FDI, and (iii) allow heterogeneity across countries, using instrumental variable QR for panel data with fixed effect. Our empirical results reinforce the view that FDI is positively related to economic growth in under-developed countries where the rate of growth is relatively low.

Suggested Citation

  • Lijuan Huo & Tae-Hwan Kim & Yunmi Kim, 2015. "Revisiting the Effect of FDI on Economic Growth using Quantile Regression," Working papers 2015rwp-83, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2015rwp-83
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    References listed on IDEAS

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    1. Balasubramanyam, V N & Salisu, M & Sapsford, David, 1996. "Foreign Direct Investment and Growth in EP and IS Countries," Economic Journal, Royal Economic Society, vol. 106(434), pages 92-105, January.
    2. 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.
    3. Tae-Hwan Kim & Christophe Muller, 2004. "Two-stage quantile regression when the first stage is based on quantile regression," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 218-231, June.
    4. Barro, Robert J. & Lee, Jong Wha, 2013. "A new data set of educational attainment in the world, 1950–2010," Journal of Development Economics, Elsevier, vol. 104(C), pages 184-198.
    5. Karin Olofsdotter, 1998. "Foreign direct investment, country capabilities and economic growth," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(3), pages 534-547, September.
    6. Chernozhukov, Victor & Hansen, Christian, 2008. "Instrumental variable quantile regression: A robust inference approach," Journal of Econometrics, Elsevier, vol. 142(1), pages 379-398, January.
    7. Usha Nair‐Reichert & Diana Weinhold, 2001. "Causality Tests for Cross‐Country Panels: a New Look at FDI and Economic Growth in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 153-171, May.
    8. Jong Il Choe, 2003. "Do Foreign Direct Investment and Gross Domestic Investment Promote Economic Growth?," Review of Development Economics, Wiley Blackwell, vol. 7(1), pages 44-57, February.
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    11. V. N. Balasubramanyam & M. Salisu & David Sapsford, 1999. "Foreign direct investment as an engine of growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 8(1), pages 27-40.
    12. Sophia Dimelis & Helen Louri, 2002. "Foreign ownership and production efficiency: a quantile regression analysis," Oxford Economic Papers, Oxford University Press, vol. 54(3), pages 449-469, July.
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    Keywords

    FDI; Quantile Regression; Panel Data; Endogeneity; Instrumental Variable;
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