Impact of Economic Infrastructure and Inward Foreign Direct Investment on Economic Development: Evidence from Developing Countries

Abstract

This study examined if inward foreign direct investment (to be referred to as FDI henceforth) and economic infrastructural in a country interact insofar as economic development is concerned. The study classified 95 developing countries selected based on data availability by geographical region. Secondary data from 1998 to 2020 was used and regression analysis performed on panel data set spanning for 23 years using E-views. Eleven equations were tested for robustness and results analyzed. The study found that FDI inflows and economic infrastructure individually increase gross domestic product per capita growth. This study also used a distributed-lag model and showed that economic infrastructure and inward FDI interact with a lag. The study established that last period’s economic infrastructure and inward FDI interact. This, positively and significantly, increase current gross domestic product per capita. Unambiguously therefore, this paper concluded that economic infrastructure is the main transmission mechanism through which FDI influences the host country’s economic development. Good economic infrastructure increases productivity of investment and therefore promotes FDI inflows. Consequently, gross domestic product per capita increases. This, ceteris paribus, raises global welfare. Physical domestic investment is exogenous in this paper’s modelling and can be endogenous in a second equation. The paper therefore used instrumental variables (IV) through a stronger method of 2SEGLS (Two Stages Estimated Generalized Least Square) and showed the implicit “second” estimated equation of physical domestic investment. The empirical finding from this autoregressive model showed that inward FDI could be crowding out domestic investment in developing countries.