Foreign direct investment, technological innovation and economic growth: empirical evidence using simultaneous equations model

Abstract

The effect of foreign direct investment on economic growth has been widely discussed in theoretical and empirical works. While the positive effects of FDI have been widely known in the theoretical literature, empirical works developed over the past two decades on the subject led to mixed conclusions. The main objective of this paper was to clarify this relationship by examining the above interaction focusing on the role of technological innovation in this relationship. To do this, a simultaneous equations model describing the interrelationship between foreign direct investment, technological innovation and economic growth for 83 developed and developing countries is estimated over the period 1990–2012. Our empirical results show that there is a positive and significant effect of foreign direct investment on economic growth only for middle- and high-income countries, whereas for low-income countries foreign direct investment does not have a positive impact on these economies. Our findings show also that technological innovation plays an important role in determining the foreign direct investment–economic growth relationship.