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.