The role of foreign direct investment in growth: Spain, 1964–2013

Oscar Bajo-Rubio

doi:10.1108/aea-07-2021-0157

Abstract

Purpose Foreign direct investment (FDI) has played a major role in the deep process of transformation experienced by the Spanish economy since the first 1960s, which even intensified, following the integration with the now European Union in 1986. This paper aims to analyse the long-run effects of FDI in Spain by estimating a production function including the foreign capital stock over the period 1964–2013. Design/methodology/approach The author estimates a production function including the foreign capital stock over the period 1964–2013, from which the contributions of the different explanatory variables on the accumulated growth of gross domestic product (GDP) are computed. Next, the author tested for the possible presence of structural change in the previously estimated equation, by means of the tests of Bai and Perron, re-estimating the production function for the different subperiods delimited by the structural breaks found. Finally, the analysis is completed by performing Granger-causality tests on the variables GDP and foreign capital stock in a multivariate setting. Findings The author finds a significant contribution of foreign capital on the accumulated growth of GDP over the period of analysis, which seems however to have been greater during the first years of the period analysed. Foreign capital can play a positive role in the economic growth of an economy, provided that FDI inflows are stable and permanent enough, but this effect on growth seems to be more important in the first stages of a growth process. Originality/value The author presents a comprehensive analysis of the relationship between FDI and growth for a particular country, which seems to be a more promising empirical approach rather than the approach based on panel regressions, where sometimes some dissimilar experiences are added together. The Spanish economy can provide a relevant case study, given the substantial process of growth it enjoyed starting from the early 1960s, characterized by the arrival of vast inflows of foreign capital.

Highlights

Foreign direct investment (FDI) has played an increasing role as a way of internationalization of the economic activity since the end of Second World War
The role of FDI on economic growth has been extensively analysed in the past years, by means of multivariate regressions over long-time spans, where either gross domestic product (GDP) or its rate growth was made dependent on a series of macroeconomic variables, including the ratio of FDI inflows to GDP
This paper found a positive influence of accumulated FDI inflows on the evolution of GDP per employee and, eventually, on regional growth, provided that the host economies have an appropriate level of development, and the necessary absorptive capacity of FDI

Summary

20 September 2021 Accepted 25 September 2021

Purpose – Foreign direct investment (FDI) has played a major role in the deep process of transformation experienced by the Spanish economy since the first 1960s, which even intensified, following the integration with the European Union in 1986. This paper aims to analyse the long-run effects of FDI in Spain by estimating a production function including the foreign capital stock over the period 1964–2013. Design/methodology/approach – The author estimates a production function including the foreign capital stock over the period 1964–2013, from which the contributions of the different explanatory variables on the accumulated growth of gross domestic product (GDP) are computed. Findings – The author finds a significant contribution of foreign capital on the accumulated growth of GDP over the period of analysis, which seems to have been greater during the first years of the period analysed. Foreign capital can play a positive role in the economic growth of an economy, provided that FDI inflows are stable and permanent enough, but this effect on growth seems to be more important in the first stages of a growth process.

Introduction

Findings

Conclusions