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FDI and economic growth: the role of natural resources?

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  • Arshad Hayat

Abstract

Purpose - The purpose of this paper is to investigate the foreign direct investments (FDI)-growth nexus and the impact of natural resource abundance in the host country on the FDI-growth nexus. Design/methodology/approach - For a large data set of 104 countries for the period 1996-2015, Arellano and Bond’s GMM estimation method is applied to investigate the impact of FDI inflow on economic growth and the role of the natural resource sector on the FDI-growth relationship. Findings - The paper found a positive and significant effect of FDI inflows on economic growth of the host country. However, the impact of FDI inflows on economic growth changes with the changes in the size of the natural resource sector. The estimated positive impact of FDI inflows on economic growth declines with the expansion in the size of natural resources. Beyond a certain limit, a further expansion in the size of natural resource sector will lead to a negative effect of FDI on economic growth. Research limitations/implications - The paper found a positive and significant impact of FDI inflows on economic growth of the host country. However, the impact of FDI inflows on economic growth changes with the changes in the size of the natural resource sector. The estimated positive impact of FDI inflows on economic growth declines with the expansion in the size of the natural resources. Beyond a certain limit, a further expansion in the size of the natural resource sector will lead to a negative effect of FDI on economic growth. The same analysis is repeated for groups of countries divided into different income groups. FDI inflows are found to have significant growth enhancing role in all three groups of countries. However, FDI inflows-induced growth was found to be more pronounced in the middle- and low-income countries compared to high-income countries. Further, FDI-induced economic growth is slowed down in low-income and middle-income countries by the increase in size of the natural resource sector. While in high-income countries, the size of the natural resource sector has no significant role on the FDI-growth nexus. Practical implications - While countries use their natural resource sector as an instrument to attract FDI into the countries, low- and middle-income countries face the dilemma of experiencing the resource curse in the form of watered down FDI-induced growth. Therefore, low- and middle-income countries need to try at the same time to attract FDI into the non-resources sector to keep the relative size of the natural resource sector low as to avoid hampering the FDI-induced economic growth. High-income countries, on the other hand, do not experience the FDI-induced growth hampering impact of the natural resource sector. Therefore, high-income countries should attract FDI into the countries regardless of the sector attracting the foreign investments. Originality/value - The paper is part of the author’s PhD research and is an original contribution.

Suggested Citation

  • Arshad Hayat, 2018. "FDI and economic growth: the role of natural resources?," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 45(2), pages 283-295, May.
    • Handle: RePEc:eme:jespps:jes-05-2015-0082
    DOI: 10.1108/JES-05-2015-0082
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    14. Hayat, Arshad & Cahlik, Tomas, 2017. "FDI, natural resource and economic growth: A Threshold model approach," MPRA Paper 100271, University Library of Munich, Germany.
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    More about this item

    Keywords

    Economic growth; Foreign direct investment; Natural resources; Generalized method of moments; Arellano and bond; Resource curse; F23; F43; O4; Q0;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General

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