Does inflow of foreign direct investment stimulate economic growth? Evidence from developing countries

Abstract

This paper examines the effect of foreign direct investment (FDI) inflows on host country’s economic growth for a group of 45 developing countries for the period 1990–2014. Using the pooled mean group (PMG) regression method, we estimate the long-run and the short-run impact of FDI inflows on growth rate of GDP per capita. The PMG regression results suggest that the growth rate of GDP per capita and its covariates are cointegrated, implying the presence of a long-run equilibrium relationship among the variables. Our results suggest that FDI inflows have significant positive impact on economic growth of the recipient countries both in the long-run and in the short-run. We find that the long-run effect of FDI inflows on economic growth is higher in the emerging market economies as compared to the non-emerging market economies. FDI inflows have significant positive effect on the long-run economic growth in Asia and Africa region.

Keywords:

• Foreign direct investment
• economic growth
• developing countries
• pooled mean group regression

JEL CLASSIFICATIONS:

• F23
• F36
• O16
• O40

Acknowledgements

This paper is based on the author’s PhD work at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.

The author would like to thank Professor Pradipta Chaudhury and Professor Sabyasachi Kar for their valuable comments. An earlier version of this paper was presented at the 54th Annual Conference of the Indian Econometric Society (TIES) hosted Shri Mata Vaishno Devi University, Jammu during 7–9 March, 2018. The author would like to thank the editor and the anonymous reviewers for their useful comments that helped improve this paper. The usual disclaimer applies.

Disclosure statement

The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Notes

1 FDI is defined as an investment to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. It entails a significant degree of influence (ownership of 10% or more of voting stock) by the investor on the management of the enterprise.

2 The list of countries is given in Table 4A in the Appendix. We have considered all the developing countries with population more than 10 million and for which data are available for the period 1990–2014.

3 MNCs own and operate business in multiple countries. They possess huge capital (both physical and financial assets) due to their widespread presence through production and marketing operations in several countries.

4 We use the Standard & Poor’s classification (2014) to categorise our sample countries as EMEs and Non-EMEs. The EMEs are Brazil, Chile, China, Colombia, Egypt, India, Malaysia, Mexico, Morocco, Peru, Philippines, South Africa, Thailand, and Turkey.

5 The rest of the countries (other than those mentioned in endnote 4) included in our sample are categorised as Non-EMEs.

6 The list of countries included in the regional sub-samples are given below.

• Asia: Bangladesh, China, India, Iran, Malaysia, Pakistan, Philippines, Saudi Arabia, Sri Lanka, Thailand, Turkey.

• Africa: Algeria, Benin, Burkina Faso, Cameroon, Chad, Côte d'Ivoire, Egypt, Ghana, Guinea, Kenya, Madagascar, Malawi, Mali, Morocco, Mozambique, Niger, Nigeria, Rwanda, Senegal, South Africa, Uganda, Tanzania, Tunisia.

• Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Dominican Republic, Ecuador, Guatemala, Mexico, Peru, Venezuela.

Additional information

Notes on contributors

Jagadish Prasad Sahu

Jagadish Prasad Sahu is a PhD candidate at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi, India. He works as an Assistant Professor of Economics at School of Business, University of Petroleum and Energy Studies, Dehradun, India. His areas of research include international economics and macroeconomics. He has published several research articles in peer-reviewed journals.