In search of FDI-led growth in developing countries: The way forward

• Published in: Economic modelling Vol. 25; no. 5; pp. 793 - 810
• Main Authors: Herzer, Dierk, Klasen, Stephan, Nowak-Lehmann D., Felicitas
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-09-2008; Elsevier; Elsevier Science Ltd
• Series: Economic Modelling
• Subjects: C22; Cointegration; Cointegration analysis; Cross-national analysis; Developing countries; Economic growth; Economic impact; Economic theory; F43; FDI; Foreign direct investment; Foreign investment; Growth; LDCs; Market analysis; Studies; Developing countries; C22; FDI; F43; Growth; Cointegration
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2007.11.005

This paper challenges the widespread belief that FDI generally has a positive impact on economic growth in developing countries. It addresses the limitations of the existing literature and re-examines the FDI-led growth hypothesis for 28 developing countries using cointegration techniques on a country-by-country basis. The paper finds that in the vast majority of countries, there exists neither a long-term nor a short-term effect of FDI on growth; in fact, there is not a single country where a positive unidirectional long-term effect from FDI to GDP is found. Furthermore, our results indicate that there is no clear association between the growth impact of FDI and the level of per capita income, the level of education, the degree of openness and the level of financial market development in developing countries.