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The Elusive Link Between FDI and Economic Growth

Author

Listed:
  • Agustin Benetrix

    (IM-TCD, Trinity College Dublin)

  • Hayley Pallan

    (World Bank)

  • Ugo Panizza

    (IHEID, Graduate Institute of International and Development Studies, Geneva)

Abstract

This paper revisits the link between FDI and economic growth in emerging and developing economies. When we study the early decades of our sample, we find that there is no statistically significant correlation between FDI and growth for countries with average levels of education or financial depth. In line with previous contributions, we find that this correlation is positive and statistically significant for countries with sufficienty well-developed financial sectors or high levels of human capital. However, we also find that the link between FDI and growth varies over time. For more recent periods, we find a positive and statistically significant relationship between FDI and growth for the average country, with local conditions having a negative e ect on this link. We also develop a novel instrument aimed at addressing the endogeneity of FDI inflows. Instrumental variable estimates suggest that our results are unlikely to be driven by endogeneity.

Suggested Citation

  • Agustin Benetrix & Hayley Pallan & Ugo Panizza, 2022. "The Elusive Link Between FDI and Economic Growth," IHEID Working Papers 26-2022, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp26-2022
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    More about this item

    Keywords

    FDI; Economic Growth; Human Capital; Financial Development;
    All these keywords.

    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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