Foreign direct investment: Catalyst of economic growth

This dissertation is an inquiry focused on the causal relationship between foreign direct investment (FDI) and economic growth in both developed and developing countries. Chapter 1 surveys the theoretical foundations and seminal empirical works, and motivates the remainder of the dissertation. This chapter shows that theory mainly points towards a positive FDI to economic growth link, but the empirical findings are highly heterogeneous. Chapter 1 also highlights recent trends in FDI in order for the reader to see FDI's increasing role in the global economy. Chapter 2 considers how the FDI and economic growth connection varies by income levels, using panel cointegration and Granger causality techniques. The two main findings are that in the long run the causal relationship is primarily running from GDP to FDI and short run FDI to GDP causality is restricted to high income countries. Chapter 3 tests for the direction of causation between FDI and GDP in a group of Latin American and East Asian countries attempting to identify differences between the regions. Innovation accounting, in combination with standard Granger causality tests are used to test for the causal relationship between FDI and GDP. FDI to GDP causality is found to be more apparent in East Asia. Chapter 4 considers the case of Mexico. This chapter attempts to indentify how the FDI-growth connection varies by sector in the Mexican economy. In Mexico, FDI to economic growth causality is restricted to the industrial and agriculture sectors. Much more evidence was found in favor of the GDP to FDI link. The final chapter gives concluding remarks, general policy recommendations, and suggestions for future research. The three general findings of the dissertation are that: (a) FDI to GDP causality is more common in higher income countries where a threshold level of development has been reached; (2) causation is primarily running from economic growth to FDI. It is higher levels of economic growth that are attracting FDI, not FDI spurring economic growth; (3) FDI causes economic growth primarily in the manufacturing sector. This has profound policy implications for developing countries.