Causal Interactions Between Foreign Direct Investments, Trade, and Economic Growth

Abstract

The main objective of this chapter is to detect the impacts of FDI and foreign trade on the economic growth of middle income countries. Therefore, this study aims to examine the relationship among economic growth, foreign direct investments, and trade in 27 middle-income countries according to the United Nations (UN) classification through panel data analysis method. According to the results of the Pedroni cointegration test, the null hypothesis suggesting no cointegration among the series at 1% significance level is rejected in all seven tests. According to pooled mean group estimator estimation results, the coefficients of foreign direct investment and trade which have long-term impacts on economic growth are also identified. Accordingly, the coefficients of both variables are statistically significant. A 1% increase in foreign direct investment and trade increase economic growth by 0.24% and 0.02%, respectively.