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Foreign direct investment and economic growth: Exploring the transmission channels

The impact of foreign direct investment (FDI) on growth remains a thorny question for researchers and policy makers. At the theoretical level it has been argued that FDI is growth enhancing. However, existing empirical studies have left researchers and policy makers perplexed as these studies do not...

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Bibliographic Details
Published in:Economic modelling 2018-06, Vol.72, p.296-305
Main Authors: Makiela, Kamil, Ouattara, Bazoumana
Format: Article
Language:English
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Summary:The impact of foreign direct investment (FDI) on growth remains a thorny question for researchers and policy makers. At the theoretical level it has been argued that FDI is growth enhancing. However, existing empirical studies have left researchers and policy makers perplexed as these studies do not appear to find a strong relationship between the two variables. This paper departs from the existing literature by exploring the transmission channels from FDI to growth. The results, based on a sample of developed and developing countries over the period 1970–2007, conclusively reveal that FDI affects growth via inputs accumulation but not the total factor productivity growth channel. In other words, our results suggest that factors other than FDI may have contributed to the increase in productivity witnessed in developing countries in recent decades. •We investigate the transmission mechanism of foreign direct investment (FDI) to growth.•The BSFA method is used to obtain reliable estimates of TFP and input change.•Results show that FDI conclusively transmits to growth via input change.•There is no strong statistical evidence to support transmission via the TFP channel.•Our findings explain why evidence on FDI-growth nexus may be inconclusive.
ISSN:0264-9993
1873-6122
DOI:10.1016/j.econmod.2018.02.007