DETERMINANTS OF ECONOMIC GROWTH IN THE UNITED STATES: The Role of Foreign Direct Investment

Abstract

Given the continuing growth of foreign direct investment (FDI) in the United States, there is a growing interest in examining its impact on the rate of economic growth. The immense literature on economic growth in the United States is composed of studies that concentrate on measuring the domestic variables that affect U.S. economic growth. However, the impact of foreign direct investment on the economic growth of the United States has not received the attention that is deserves.The purpose of this study is: (1) to examine the determinants of economic growth in the United States over time, and(2) to see if there is any time-series support for the FDI-led growth hypothesis in the United States.To achieve these goals the study uses a model that is based on the postulates of de Mello. Employing a 40-year period of annual data, the model is estimated by using the Beach Mackinnon technique which corrects for autocorrelation. The estimation results suggest the following conclusions:1. The major determinants of economic growth in the United States are total factor productivity growth, domestic investment growth, and foreign direct investment growth.2. Causal relationships between foreign direct investment growth and economic growth is uni-directional, running from foreign direct investment to economic growth.3. Causal relationships between foreign direct investment growth and total factor productivity growth is uni-directional, running from foreign direct investment to total factor productivity.These findings suggest that foreign direct investment growth has a significant impact on the United States economic growth. Additionally, foreign direct investment has a significant impact on total factor productivity in the United States, further contributing to the United States’ economic growth. This calls on the U.S. policy makers to devise policies that are conducive to increasing the amount of foreign direct investment in this country.