Abstract
The importance of investment in accelerating economic growth is discussed widely in literature. Evidence in the existing empirical literature on the causal relationship between foreign direct investment (FDI) and economic growth is rather inconclusive. Most of these studies conduct traditional causality tests, using single time series or panel data, while we use the Bayesian econometrics to analyze. The questions of this research are whether FDI influences economic growth in the host countries? And if the answer is yes, how strong is impact of FDI on these countries’ economic growth in long-term compared to domestic investment?The results show that foreign direct investment has a significant positive impact on economical growth in the sample host countries with a high probability occurrence rate, but its impact on growth is lower than domestic investment. These results are supported by another two indices of the Bayesian econometrics: the “posterior odds ratio” and “model probability”.
Highlights
The importance of investment in accelerating economic growth is discussed widely in literature
The column “Posterior odds ratio” indicates values of likelihood probability function of a model which lacks a particular variable to value of likelihood probability function of the main model .The higher value implies on better efficiency of “without the particular variable-model” than the main model that indicates effectless and insignificancy of the given variable in the main model. This ratio for foreign direct investment (FDI) and domestic investment, is very low that implies on importance of these variables in economic growth of the selected countries
The lower value of a variable in the column implies on greater importance of the variable in the main model. The result of this index highlights the importance of FDI in economic growth of the selected countries
Summary
The importance of investment in accelerating economic growth is discussed widely in literature. On the other hand, based on UNTCAD report 2012, the share of FDI in host countries’ gross fixed capital formation is increased compared to the 90s. Evidence in the existing empirical literature on the causal relationship between FDI and economic growth is rather inconclusive. Most of these studies conducted traditional causality tests, using single time series or panel data (Nair-Reichert & Weinhold, 2001: 154), while we used Bayesian econometrics approach to analyze. If the answer is yes, how strong is impact of FDI on the selected countries’ economic growth in long-term compared to domestic investment? It's expected that FDI has a positive significant impact on the selected countries’ economic growth and leads to more growth than the domestic investment The questions of research are whether FDI influences on economic growth in the host countries? And if the answer is yes, how strong is impact of FDI on the selected countries’ economic growth in long-term compared to domestic investment? It's expected that FDI has a positive significant impact on the selected countries’ economic growth and leads to more growth than the domestic investment
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