The effects of foreign direct investment on macroeconomic variables: Evidence from both developed and developing countries

A lot of economists believe that Foreign Direct Investment (FDI) will increase GDP and inflation, lower unemployment rate and exchange rate. In this study, yearly data from 30 different countries, 15 developed and 15 developing, between the years 1980 to 2011 is used to analyze the effect of FDI to the macroeconomic variables: GDP, unemployment rate, inflation rate, interest rate and exchange rate. In this study, Vector Auto-Regression (VAR) is being used to estimate the effects. The results shown that in developed countries, both inflow FDI and net FDI lead to an increase in future FDI inflow and GDP. Unemployment rate decreases for couple years and start to increase. In developing countries, both FDI inflow and net FDI increase GDP for a period of time and then it will start to decrease. Interest rate will increase and then decrease for a long time. FDI inflow and net FDI will have different effects on inflation and unemployment rate. FDI inflow will increase inflation where net FDI will decrease the inflation rate. For unemployment rate, FDI inflow will decrease the unemployment rate and net FDI will affect the unemployment rate in the way similar to developed countries, i.e., it decreases for one year and it increases for couple years after that. Then it decreases for a long time. In the end, exchange rate experiences similar effects also. Inflow FDI and net FDI will depreciate the host countries' currency for two years and it appreciates after two years. The appreciation will last for another year and it depreciates again for a long time.