Foreign Direct Investment and Economic Growth: Does Gross Fiscal Formation and Trade Openness Matter?

Abstract

The currents study has examined the relationship between foreign direct invest and economic growth. In addition to that the study has also examined the role of gross fixed capital formation in fostering economic growth. The study has used the data of 28 years from the period starting from 1991 to 2018. In the study, panel data estimates were used, and the most reliable results from the diagnostic test came from the fixed effect model. The technique of estimate based on panel data is the one that works well for this kind of inquiry. Panel data is desirable because it can account for and even minimize individual variation, providing lower collinearity across variables and more degrees of freedom, as well as uncover and quantify consequences. Panel data is also advantageous since it can discover and quantify causes. At the 95% confidence level, the panel unit root test reveals that all variables are stationary. This conclusion is based on the results of the test. A supplemental estimate may be obtained through the use of the fixed effects model. All of the variables that were put through their paces were found to be stable and significant at the 5% level of significance. If the Hausman test is carried out, it is generally agreed that the model with fixed effects is superior to the model with random effects, which is its counterpart. According to the results of the model with fixed effects, every variable has a significant and favorable association with GDP. A rise in foreign direct investment (FDI) is correlated with an increase in commercial activity and the formation of more stable forms of capital, both of which may drive GDP growth. GDP may be increased by a variety of means, including gross fixed capital creation, foreign direct investment, and openness; hence, each of these may also contribute to economic growth. It has been shown that there is a positive correlation between each model variable and GDP.