Growth Effects Of Foreign Direct Investment Research Articles

Threshold effects of inflation on the FDI – growth nexus: evidence from inflation-targeting countries in sub-Saharan Africa

The purpose of this study is to examine the threshold effect of inflation on the foreign direct investment (FDI) – economic growth nexus in sub-Saharan Africa using panel samples of countries that have adopted an inflation-targeting regime. The study sourced data from the World Bank’s World Development Indicators over a period of 1982–2020 and adopted the fixed-effect panel threshold model approach for its analysis. The findings reveal two separate thresholds of inflation in the FDI – growth nexus. The growth-enhancing effect of FDI is largely realized when inflation is below the optimal threshold level of 7.26%. Beyond the second threshold level of 16.49%, the beneficial effect of FDI on growth is seen to diminish in terms of effect-size. This study provides new insights into the growth effect of FDI and the role of inflation levels in this nexus. The thresholds of inflation and the attendant size-effect of FDI on growth can be benchmarks for Africa and other developing and emerging economies in assessing their situations. As African monetary authorities choose which inflation targets to set for their monetary policies, the findings raise significant implications for them.

Foreign direct investment and economic growth nexus in ECOWAS: The leveraging effect of anti-corruption

Purpose ― This paper sought to investigate the interactive effect of corruption and FDI on economic growth in the Economic Community of West African States (ECOWAS) region empirically. Methods ― With panel data spanning 2000–2019 across 15 ECOWAS countries, this paper estimates its results by employing the system-GMM estimator, which combines a system of regressions in difference and in levels to resolve the problem of endogeneity. Findings ― Results reveal that while FDI independently spurs economic growth, control of corruption has no direct effect on growth in the region. The interactive effects reveal the complementarity between FDI and control of corruption in promoting economic growth in the ECOWAS region. The growth effect of FDI is larger and stronger given an improvement in the control of corruption across the 1st, 5th, 10th, and 25th percentiles. Implication ― To improve investor confidence, bolster FDI inflows and optimize its beneficial impacts on economic growth, this paper calls for measures to increase transparency and stronger political commitment to strictly investigate, prosecute and punish corruption in the ECOWAS region. Originality/value ― Although foreign direct investment (FDI) to host countries have been shown in the literature to be a crucial driver of economic growth, little is known about how anti-corruption measures affect the FDI-growth relationship. This paper contributes to policy by providing empirical evidence to bridge this gap.

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

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.

Growth effect of foreign direct investment and financial development: new insights from a threshold approach

PurposeThe purpose of this study is to examine the effect of foreign direct investment (FDI) on economic growth contingent on the development level of the local financial system in emerging and developing Asia during the period 1996–2017.Design/methodology/approachThe study adopts the threshold approach, namely the panel smooth transition regression (PSTR) model, for the annual data collection of 18 emerging and developing Asian countries in 22 years. The authors analyze the alternative PSTR models on different proxies of financial development (FD).FindingsThe results show new findings of two distinct thresholds of FD in the FDI–growth nexus. The growth-enhancing effect of FDI is realized only when the FD lies between the two threshold values. Notably, at very high levels of FD, the beneficial effect of FDI on growth is vanishing.Originality/valueThe authors provide new insights into the growth effect of FDI and the role of FD. The estimated nonlinear effect of FDI on growth and the thresholds of FD can be benchmarks for emerging and developing Asia in assessment of their situations. The results suggest important implications to the region in setting the long-run policies to boost the effect of FDI on economic growth.

Growth Effects of Foreign Direct Investment (FDI) From China and Other Sources in Africa: The Role of Institutional Quality

This study examines the effects of Foreign Direct Investment (FDI) from China, United States (US), European Union (EU) and the rest of Asia on economic growth conditional on the institutional quality of sub-Sahara Africa for the period (2003-2012). We develop theoretical argument from the existing literature to show that institutional heterogeneity may be one of the description for mixed findings of previous empirical studies on the growth effects of Chinese FDI in Africa. We use rule of law to proxy for institutional quality. Using Panel Threshold Regression (PTR) model, we show that FDI from all these sources have a positive impact on growth only above certain thresholds of rule of law and these thresholds differ from one source to the other. However, for FDI from China and the rest of Asia, the difference is marginal. That is, the growth effect of FDI from Asia is positive in countries with governance rating of at least -0.89 while negative in countries falling within a range of -1.35 and -0.89. In terms of FDI from EU and US, beneficial outcomes on growth are realized in countries with governance rating of at least -0.90 and -0.62, respectively. These results confirm that China and the rest of Asia do invest in both weak and strong governance countries in sub-Sahara Africa although the impact is different. Whereas, US and EU seem to invest only in strong governance African countries. However, the former is more sensitive to institutional quality than the latter.

Growth effect of foreign direct investment: The role of labor market flexibility

This paper deals with the role of the labor market in moderating the growth-effect of foreign direct investment (FDI) in developing countries. FDI has developed rapidly and become the main source of economic growth in developing countries. The purpose of this paper is to examine the role of labor market flexibility in mediating the impact of FDI on economic growth in developing countries. Panel threshold regression analysis proposed by Hansen (1999) is employed to assess the hypothesis of the study. Findings/Originality : The results provide the empirical finding of the role labor market in moderating the growth effect of FDI in developed and developing countries and fill this gap by assessing the role of labor market flexibility as an absorptive capacity in FDI-growth link in developing countries.

Foreign direct investment, regulations and growth in sub-Saharan Africa

This paper examines the effect of foreign direct investment (FDI) on economic growth and determines how the regulatory regime of the countries affects the FDI-growth relationship for 22 sub-Saharan African countries for the period 1980–2011. Using General Methods of Moments (GMM) estimation technique, the findings of the study show that both FDI and regulations (total regulations, credit market regulations, business regulations and labor market regulations) do not have an independent significant effect, however, their interaction has a significant positive effect on economic growth. This implies that the growth effect of FDI is stimulated in the presence of effective and quality regulations. Therefore measures have to be put in place to strengthen regulations in sub-Saharan Africa in order to realize the benefits of FDI.

How Does Foreign Direct Investment Really Affect Developing Countries' Growth?

AbstractTwo main contributions to literature on foreign direct investment (FDI) and economic growth are made in this paper. First, the paper examines the effect of FDI on economic growth for 44 developing countries using heterogeneous panel cointegration techniques that are robust to omitted variables and endogenous regressors. The main result is that FDI has, on average, a negative effect on growth in developing countries, but there are large differences in the effect across countries. Second, a general‐to‐specific model‐selection approach is used to systematically search for country‐specific factors explaining the cross‐country differences in the growth effects of FDI. The results suggest that the cross‐country heterogeneity in the growth effect of FDI can be explained mainly by cross‐country differences in freedom from government intervention, business freedom, FDI volatility, and primary export dependence.

Growth effects of FDI in 80 developing economies: the role of policy reforms and institutional constraints

Theoretical and empirical literatures have identified several channels through which foreign direct investment (FDI) influences economic growth. This paper examines the impact of FDI on economic output growth per worker using aggregate production function augmented with FDI inflows, economic policy reforms and institutional constraints. The paper covers 80 developing countries over the period 1980–2006. We use panel data and employ fixed, random effects and GMM methods for estimation. Our results highlight the importance of FDI, policy reforms and institutional development for growth in developing economies. Finally, we demonstrate that irrespective of reforms and institutions, an increase in FDI affects output growth positively.

Growth effects of FDI and portfolio investment flows to developing countries: a disaggregated analysis by income levels

What is the impact of foreign direct investment (FDI) and portfolio investment flows on the economic growth of low-, lower middle- and upper middle-income countries? In this article we address this question using a dynamic panel model and a large data set of 126 developing countries for the period 1985 to 2002. Employing the system-generalized methods of moments (GMM) estimation approach, our findings suggest that only developing countries that have reached a minimum level of economic development and absorptive capacity are capturing the growth-enhancing effects of both forms of investment inflows.

Foreign Direct Investment, Macroeconomic Instability and Economic Growth in Mena Countries

This paper aims at analyzing the possible influence of foreign direct investment (FDI) on economic growth in the particular case of Middle East and North African countries (MENA). During the last years, the relation between FDI and growth in LDCs has been discussed extensively in the economic literature. However, the view that FDI stimulates economic growth does not receive an unanimous support. In order to access empirically this relation in MENA countries, we use a dynamic panel procedure with observations per country over the period 1970-2005. To improve efficiency, we use the standard “difference” and “system” GMM and 2SLS estimators. Our findings show that there is no independent impact of FDI on economic growth. The growth-effect of FDI does not also depend on degree of openness to trade and income per capita. But, the positive impact of FDI on economic growth depends on macroeconomic stability: there is a threshold effect of annual percentage change of consumer prices.

FDI and growth: a varying relationship across regions and over time

This article investigates the relationship between foreign direct investment (FDI) inflows and economic growth for a panel of 110 countries over the period 1973 to 2002. The results show that the growth effect of FDI varies by region and over time.

Foreign Direct Investment, Macroeconomic Instability and Economic Growth in MENA Countries

This paper aims at analyzing the possible influence of foreign direct investment (FDI) on economic growth in the particular case of Middle East and North African countries (MENA). During the last years, the relation between FDI and growth in LDCs has been discussed extensively in the economic literature. However, the view that FDI stimulates economic growth does not receive an unanimous support. In order to access empirically this relation in MENA countries, we use a dynamic panel procedure with observations per country over the period 1970-2005. To improve efficiency, we use the standard “difference” and “system” GMM and 2SLS estimators. Our findings show that there is no independent impact of FDI on economic growth. The growth-effect of FDI does not also depend on degree of openness to trade and income per capita. But, the positive impact of FDI on economic growth depends on macroeconomic stability: there is a threshold effect of annual percentage change of consumer prices.