Causality between foreign direct investment and economic growth for Cambodia

Abstract

The relationship between foreign direct investment (FDI) and economic growth in recipient economies remains one of the hottest debates. As confirmed in the literature, many studies support the growth impact of FDI, but some do not. Cambodia, a war-torn economy, also depends on FDI as a driver of economic growth. In addition, the causal relationship between FDI and growth in Cambodia is not fully known. Therefore, this paper is an attempt to examine the causal link between the two variables over the period 1980–2014, using Granger causality test based on the vector error correction model. The empirical results provide strong evidence on the causal impact of FDI on Cambodia’s economic growth (GDP). However, the study does not confirm causality to run from GDP to FDI. This can be concluded that the growth impact of FDI is sufficiently supported in Cambodia.

Keywords:

• causality
• Cambodia
• economic growth
• foreign direct investment

Public Interest Statement

In developing countries, it is believed that foreign direct investment (FDI) positively contributes to economic growth. In addition, many empirical findings also confirm the positive link between FDI and growth in recipient countries. Therefore, each developing country produces various policies to attract inward FDI with a purpose to enhance their economic growth and development. However, in some countries, FDI does not seem to promote growth it might be due to a number of barriers, including political instability and low levels of human capital, trade openness, or financial sector development, etc. With focus on Cambodia, FDI is found to promote economic growth, meaning that FDI is an important vehicle of growth in this country as well.

Notes

1. ASEAN stands for the Association of Southeast Asian Nations.

2. The Pol Pot regime is also known as the genocidal regime, which occurred from 1975 to early 1979 in Cambodia. Almost all types of infrastructure and approximately two million innocent lives had been destroyed in the regime.

Additional information

Funding

Funding. The author received no direct funding for this research.

Notes on contributors

Seng Sothan

Seng Sothan is an academic staff in the College of Business Management, Life University, Siahnoukville, Cambodia. The author’s research interests include development economics, social economics, and development finance.