| This study empirically examines the relationship between foreign direct investment and economic growth in South America using panel data for the period 1970-2013. The variables used in the study include real GDP, real foreign direct investment, real gross capital formation, real openness, real government consumption expenditure, index of human capital and labor force participation rate. The data were obtained from World Bank, UNCTAD and Penn Table. Ten out of twelve countries were included in the study. The study employs cointegration test and vector error correction analysis as the estimation technique. The evidence indicates that there is a positive and statistically significant long-run relationship between foreign direct investment and GDP. Additionally, the results reveal a bidirectional Granger causality between foreign direct investment and GDP in the short-run. The conclusion is that increases in FDI inflows translate to economic growth in South America. Also, in the short-run, there is a two-way causation between foreign direct investment and economic growth. The study recommends that incentives should continuously be offered by the countries in South America to attract FDI. Additionally, the region should strengthen its legal framework regulating foreign investment as this will create a conducive investment environment to attract FDI. |
