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In search of FDI-led growth in developing countries

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  • Klasen, Stephan
  • Herzer, Dierk
  • Nowak-Lehmann D., Felicitas

Abstract

This paper challenges the widespread belief that FDI generally has a positive impact on economic growth in developing countries. It addresses the limitations of the existing literature and re-examines the FDI-led growth hypothesis for 28 developing countries using cointegration techniques on a country-by-country basis. The paper finds that in the vast majority of countries FDI has no statistically significant long-run impact on growth. In very few cases, FDI indeed contributes to economic growth both in the long and the short run. But for some countries, there is also evidence of growth-limiting effects of FDI in the short or long term. Furthermore, our results indicate that there is no clear association between the growth impact of FDI and the level of per capita income, the level of education, the degree of openness, and the level of financial market development in developing countries.

Suggested Citation

  • Klasen, Stephan & Herzer, Dierk & Nowak-Lehmann D., Felicitas, 2007. "In search of FDI-led growth in developing countries," Proceedings of the German Development Economics Conference, Göttingen 2007 14, Verein für Socialpolitik, Research Committee Development Economics.
  • Handle: RePEc:zbw:gdec07:6537
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    Cited by:

    1. Chew Ging LEE, 2010. "The Nexus of Outward Foreign Direct Investment and Income: Evidence from Singapore," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 10(1).
    2. Faruk Gürsoy & Hüseyin Kalyoncu, 2012. "Foreign Direct Investment and Growth Relationship in Georgia," International Journal of Economics and Financial Issues, Econjournals, pages 267-271.
    3. Carike Claassen & Elsabé Loots & Henri Bezuidenhout, 2011. "Chinese Foreign Direct Investment in Africa," Working Papers 261, Economic Research Southern Africa.
    4. Konstantin M. Wacker, 2011. "The Impact of Foreign Direct Investment on Developing Countries’ Terms of Trade," WIDER Working Paper Series 006, World Institute for Development Economic Research (UNU-WIDER).
    5. Wacker, Konstantin M. & Großkurth, Philipp & Lakemann, Tabea, 2014. "Terms of Trade, Foreign Direct Investment, and Development: A Case of Intra-Asian “Kicking Away the Ladder”?," Working Papers on Regional Economic Integration 122, Asian Development Bank.
    6. Dennis Reinhardt, 2010. "Into the Allocation Puzzle - A sectoral analysis," IHEID Working Papers 14-2010, Economics Section, The Graduate Institute of International Studies.
    7. Sibanjan Mishra, 2016. "Macro-economic factors and foreign direct investment in India: a Toda Yamamoto causality approach," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 11(3), pages 195-208.
    8. Elias Ajaga & Peter Nunnenkamp, 2008. "Inward FDI, Value Added and Employment in US States: A Panel Cointegration Approach," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 63(04), pages 347-367, December.
    9. Konstantin M. Wacker, 2011. "Do multinationals beat down developing countries' export prices? The impact of FDI on net barter terms of trade," Ibero America Institute for Econ. Research (IAI) Discussion Papers 211, Ibero-America Institute for Economic Research.
    10. Nabila Asghar & Samia Nasreen & Hafeez ur Rehman, 2012. "Relationship between FDI and Economic Growth in Selected Asian Countries: A Panel Data Analysis," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 84-96, February.
    11. Dennis Reinhardt, 2010. "Into the Allocation Puzzle - A sectoral analysis," IHEID Working Papers 14-2010, Economics Section, The Graduate Institute of International Studies.

    More about this item

    Keywords

    FDI; Growth; Developing countries; Cointegration;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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