Analyzing Impacts of Foreign Direct Investment on Private Sector in Economic Growth of Iran

Abstract

The objective of this paper is to investigate and analyze the relationship between foreign direct investment (FDI) and economic growth, and the influence of FDI on private sector in stimulating economic and industrial growth in Iran. The general assertion in financial literature supports the construct that FDI is the prime modality for stimulating economic and industrial development in developing nations. As an empirical work, we have studied the direct and indirect effects of FDI on economic growth of Iran during the period 1970-2012. Results of regression model estimation have showed that coefficient of FDI (foreign direct investment, net inflows (% of GDP)) wasn’t significant, but interaction between FDI and private sector has a significant impact on economic growth of Iran at 5% significant level in the period 1970-2012. This finding show that impacts of FDI on economic growth depends on the extent of the development of the private sector. Private sector acts as a channel for the linkage effect to be realized and create positive spillovers. Also, our findings indicate that trade openness is positively and significantly correlated with economic growth of Iran in the selected period.