GDP growth determinants and foreign direct investment causality: the case of Iran

Abstract

Given the economic conditions in Iran and the need to accelerate its economic growth, there is a rising interest in examining the variables that fuel its GDP growth. The scant literature on economic growth in Iran is composed of only a few scholarly studies that investigate this nation's GDP growth. However, none of these studies has examined the causality between GDP growth and its determining elements. The purpose of this study is: (1) to determine the economic variables that contribute to Iran's GDP per capita growth over time, and (2) to examine the causality between foreign direct investment and the relevant variables that are included in the model. To achieve these goals the study uses a model that is based on the postulates of de Mello. The results indicate that: (1) the major determinants of GDP per capita growth in Iran are value added growth and domestic investment growth; (2) there is no causal relationship between foreign direct investment growth and GDP per capita growth in Iran in either direction; and (3) there is no causal relationship between foreign direct investment growth and value added growth in Iran in either direction.

KEYWORDS:

• Economic development
• foreign direct investment
• Granger causality
• productivity
• time-series analysis
• developing countries
• Iran

JEL Classification:

• C22
• F21
• O47

Aknowledgements

I would like to thank professor Reza Saidi and the anonymous referees for their helpful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. See Schneider and Frey (1985) for a detailed discussion the on economic and political determinants of FDI.

2. For a discussion of the effect of oil price shocks on Iranian economy see Farzanegan and Markwardt (2009).