Does Foreign Direct Investment Spur Economic Growth and Development? A Comparative Study

Abstract:The study empirically investigates whether and to what extent Foreign Direct Investment (FDI) spurs economic growth and development by taking development levels and the quality of host country institutions into account. The study uses the economic freedoms index to proxy the quality of host country institutions. This study examines a sample of 125 countries (38 developed, 58 developing and 29 least developed countries) over the 1980-2010 period by using the panel least squares method with fixed effects. Four main regressions are estimated in which per capita income, the human development index (HDI), the education index and the health index of the UNDP are used as the dependent variables. The results show that FDI spurs economic growth and development in developed, developing and the least developed countries. Nevertheless, the magnitudes of the effect of FDI on growth and development are non-uniform across country groups. It is found that FDI enhances growth and development in developing countries to a higher extent compared with developed and the least developed countries. The economic freedoms index also generated the expected positive coefficient which verifies the importance of high-quality institutions for growth and development.

Publication year:2012

Keywords:FDI, Growth, Development

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