Investment Motives of MNES, FDI in Specific Sectors and Economic Growth

Abstract

Drawing on mainstream theories on investment motives of multinational corporations (MNCs), known as eclectic paradigm (Dunning, 2000), and foreign direct investment (FDI)-growth nexus (Borensztein et al., 1998), this paper examines how different investment motives of MNCs affect the economic growth in host countries. It first constructs a theoretical framework in which different motives of MNCs drive FDI into different specific sectors and, in turn, affect host countries' long-term economic growth. The paper then tests the theoretical predictions on a panel of 16 least developed countries in Africa during the 2001-2017 period. Estimation results, obtained from the generalised method of moments, reveal significant and positive effects of FDI in manufacturing and FDI in agri-aquaculture but insignificant effects of FDI in utility supply and FDI in infrastructure construction on GDP growth. While the growth effect of FDI in extractive sectors is mostly negative, it is statistically insignificant. The results are robust across different regression specifications and proxies of FDI variables. They convey useful implications for research and public policy in FDI receiving countries.