IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v72y2018icp296-305.html
   My bibliography  Save this article

Foreign direct investment and economic growth: Exploring the transmission channels

Author

Listed:
  • Makiela, Kamil
  • Ouattara, Bazoumana

Abstract

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.

Suggested Citation

  • Makiela, Kamil & Ouattara, Bazoumana, 2018. "Foreign direct investment and economic growth: Exploring the transmission channels," Economic Modelling, Elsevier, vol. 72(C), pages 296-305.
    • Handle: RePEc:eee:ecmode:v:72:y:2018:i:c:p:296-305
    DOI: 10.1016/j.econmod.2018.02.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999317310453
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2018.02.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Binder, Michael & Hsiao, Cheng & Pesaran, M. Hashem, 2005. "Estimation And Inference In Short Panel Vector Autoregressions With Unit Roots And Cointegration," Econometric Theory, Cambridge University Press, vol. 21(4), pages 795-837, August.
    2. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    3. Balasubramanyam, V N & Salisu, M & Sapsford, David, 1996. "Foreign Direct Investment and Growth in EP and IS Countries," Economic Journal, Royal Economic Society, vol. 106(434), pages 92-105, January.
    4. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    5. Léopold Simar & Valentin Zelenyuk, 2011. "Stochastic FDH/DEA estimators for frontier analysis," Journal of Productivity Analysis, Springer, vol. 36(1), pages 1-20, August.
    6. Holger Görg & David Greenaway, 2016. "Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?," World Scientific Book Chapters, in: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT Volume 53: World Scientific Studies in International Economics, chapter 9, pages 163-189, World Scientific Publishing Co. Pte. Ltd..
    7. Luiz R. de Mello Jr., 1997. "Foreign Direct Investment in Developing Countries: A Selective Survey," Studies in Economics 9701, School of Economics, University of Kent.
    8. Brian J. Aitken & Ann E. Harrison, 2022. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 6, pages 139-152, World Scientific Publishing Co. Pte. Ltd..
    9. Mastromarco, Camilla & Simar, Léopold, 2018. "Globalization and productivity: A robust nonparametric world frontier analysis," Economic Modelling, Elsevier, vol. 69(C), pages 134-149.
    10. Durlauf, Steven N. & Johnson, Paul A. & Temple, Jonathan R.W., 2005. "Growth Econometrics," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.),Handbook of Economic Growth, edition 1, volume 1, chapter 8, pages 555-677, Elsevier.
    11. repec:bla:obuest:v:61:y:1999:i:4:p:455-87 is not listed on IDEAS
    12. Enrique Moral-Benito, 2012. "Determinants of Economic Growth: A Bayesian Panel Data Approach," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 566-579, May.
    13. Jonathan Temple, 2005. "Dual Economy Models: A Primer For Growth Economists," Manchester School, University of Manchester, vol. 73(4), pages 435-478, July.
    14. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    15. Azman-Saini, W.N.W. & Baharumshah, Ahmad Zubaidi & Law, Siong Hook, 2010. "Foreign direct investment, economic freedom and economic growth: International evidence," Economic Modelling, Elsevier, vol. 27(5), pages 1079-1089, September.
    16. Miao Wang & M. C. Sunny Wong, 2009. "Foreign Direct Investment And Economic Growth: The Growth Accounting Perspective," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 701-710, October.
    17. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    18. Fried, Harold O. & Lovell, C. A. Knox & Schmidt, Shelton S. (ed.), 2008. "The Measurement of Productive Efficiency and Productivity Growth," OUP Catalogue, Oxford University Press, number 9780195183528.
    19. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1999. "Geography and Economic Development," International Regional Science Review, , vol. 22(2), pages 179-232, August.
    20. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    21. Iamsiraroj, Sasi & Ulubaşoğlu, Mehmet Ali, 2015. "Foreign direct investment and economic growth: A real relationship or wishful thinking?," Economic Modelling, Elsevier, vol. 51(C), pages 200-213.
    22. Koop, Gary & Osiewalski, Jacek & Steel, Mark F J, 2000. "Modeling the Sources of Output Growth in a Panel of Countries," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(3), pages 284-299, July.
    23. John Luke Gallup & Jeffrey D. Sachs & Andrew Mellinger, 1999. "Geography and Economic Development," CID Working Papers 1, Center for International Development at Harvard University.
    24. Dierk Herzer, 2012. "How Does Foreign Direct Investment Really Affect Developing Countries' Growth?," Review of International Economics, Wiley Blackwell, vol. 20(2), pages 396-414, May.
    25. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    26. Kamil Makieła, 2017. "Bayesian Inference and Gibbs Sampling in Generalized True Random-Effects Models," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 9(1), pages 69-95, March.
    27. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    28. Sushanta Mallick & Tomoe Moore, 2008. "Foreign Capital in a Growth Model," Review of Development Economics, Wiley Blackwell, vol. 12(1), pages 143-159, February.
    29. Jinyong Hahn & Jerry Hausman & Guido Kuersteiner, 2004. "Estimation with weak instruments: Accuracy of higher-order bias and MSE approximations," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 272-306, June.
    30. Philippe Aghion & Steven Durlauf (ed.), 2005. "Handbook of Economic Growth," Handbook of Economic Growth, Elsevier, edition 1, volume 1, number 1.
    31. Rath, Badri Narayan, 2018. "Productivity growth and efficiency change: Comparing manufacturing- and service-based firms in India," Economic Modelling, Elsevier, vol. 70(C), pages 447-457.
    32. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-444, June.
    33. van den Broeck, Julien & Koop, Gary & Osiewalski, Jacek & Steel, Mark F. J., 1994. "Stochastic frontier models : A Bayesian perspective," Journal of Econometrics, Elsevier, vol. 61(2), pages 273-303, April.
    34. Hsiao, Cheng & Hashem Pesaran, M. & Kamil Tahmiscioglu, A., 2002. "Maximum likelihood estimation of fixed effects dynamic panel data models covering short time periods," Journal of Econometrics, Elsevier, vol. 109(1), pages 107-150, July.
    35. John Luke Gallup & Jeffrey D. Sachs & Andrew Mellinger, 1999. "Geography and Economic Development," CID Working Papers 01A, Center for International Development at Harvard University.
    36. Barry P. Bosworth & Susan M. Collins, 2003. "The Empirics of Growth: An Update," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 113-206.
    37. Gallup, John & Sachs, Jeffrey, 1999. "Geography and Economic Development," Harvard Institute for International Development (HIID) Papers 294434, Harvard University, Kennedy School of Government.
    38. Gallup, J.L. & Sachs, J.D. & Mullinger, A., 1999. "Geography and Economic Development," Papers 1, Chicago - Graduate School of Business.
    39. Yalta, A. Yasemin, 2013. "Revisiting the FDI-led growth Hypothesis: The case of China," Economic Modelling, Elsevier, vol. 31(C), pages 335-343.
    40. Henry Thompson, 2008. "Economic Growth with Foreign Capital," Review of Development Economics, Wiley Blackwell, vol. 12(4), pages 694-701, November.
    41. Luiz de Mello, 1997. "Foreign direct investment in developing countries and growth: A selective survey," Journal of Development Studies, Taylor & Francis Journals, vol. 34(1), pages 1-34.
    42. Hansen, Lars Peter & Heaton, John & Yaron, Amir, 1996. "Finite-Sample Properties of Some Alternative GMM Estimators," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 262-280, July.
    43. Kamil Makieła, 2014. "Bayesian Stochastic Frontier Analysis of Economic Growth and Productivity Change in the EU, USA, Japan and Switzerland," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 6(3), pages 193-216, September.
    44. Gary Koop & Jacek Osiewalski & Mark F. J. Steel, 1999. "The Components of Output Growth: A Stochastic Frontier Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 455-487, November.
    45. Jonathan R. W. Temple, 2005. "Growth and Wage Inequality in a Dual Economy," Bulletin of Economic Research, Wiley Blackwell, vol. 57(2), pages 145-169, April.
    46. V N Balasubramanyam & M Salisu & David Sapsford, "undated". "Foreign Direct Investment and Growth: New Hypotheses and Evidence," Working Papers ec7/96, Department of Economics, University of Lancaster.
    47. Feeny, Simon & Iamsiraroj, Sasi & McGillivray, Mark, 2014. "Growth and Foreign Direct Investment in the Pacific Island countries," Economic Modelling, Elsevier, vol. 37(C), pages 332-339.
    48. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    49. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    50. Krzysztof Osiewalski & Jacek Osiewalski, 2013. "A Long-Run Relationship between Daily Prices on Two Markets: The Bayesian VAR(2)–MSF-SBEKK Model," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 5(1), pages 65-83, March.
    51. Baumol, William J. & Nelson, Richard R. & Wolff, Edward N. (ed.), 1994. "Convergence of Productivity: Cross-National Studies and Historical Evidence," OUP Catalogue, Oxford University Press, number 9780195083903.
    52. Michael Danquah & Enrique Moral-Benito & Bazoumana Ouattara, 2014. "TFP growth and its determinants: a model averaging approach," Empirical Economics, Springer, vol. 47(1), pages 227-251, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mohammed Abdullah & Murshed Chowdhury, 2020. "Foreign Direct Investment and Total Factor Productivity: Any Nexus?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(2), pages 164-190, May.
    2. Bloom, David E. & Canning, David & Kotschy, Rainer & Prettner, Klaus & Schünemann, Johannes, 2024. "Health and economic growth: Reconciling the micro and macro evidence," World Development, Elsevier, vol. 178(C).
    3. Mouna Gammoudi & Mondher Cherif & Simplice Asongu, 2016. "FDI and Growth in the MENA countries: Are the GCC countries Different?," Working Papers of the African Governance and Development Institute. 16/015, African Governance and Development Institute..
    4. Shima’a Hanafy & Marcus Marktanner, 2019. "Sectoral FDI, absorptive capacity and economic growth – empirical evidence from Egyptian governorates," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 28(1), pages 57-81, January.
    5. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    6. Burcu ŞENALP, 2018. "Foreign Direct Investment, Economic Growth and Economic Freedom: A Literature Survey," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 68(2), pages 301-336, December.
    7. Ayesha Ashraf & Dierk Herzer & Peter Nunnenkamp, 2016. "The Effects of Greenfield FDI and Cross-border M&As on Total Factor Productivity," The World Economy, Wiley Blackwell, vol. 39(11), pages 1728-1755, November.
    8. Prüfer, P. & Tondl, G., 2008. "The FDI-Growth Nexus in Latin America : The Role of Source Countries and Local Conditions," Other publications TiSEM 73b28850-1597-4bcb-a76c-1, Tilburg University, School of Economics and Management.
    9. Omar G. Aziz, 2022. "FDI inflows and economic growth in Arab region: The institutional quality channel," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1009-1024, January.
    10. Coletta Frenzel Baudisch, 2018. "Sectoral FDI and the Real Exchange Rate: The Role of Financial Development," MAGKS Papers on Economics 201828, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    11. Dierk Herzer & Stephan Klasen & Felicitas Nowak-Lehmann D., 2006. "In search of FDI-led growth in developing countries," Ibero America Institute for Econ. Research (IAI) Discussion Papers 150, Ibero-America Institute for Economic Research.
    12. Gui-Diby, Steve Loris, 2014. "Impact of foreign direct investments on economic growth in Africa: Evidence from three decades of panel data analyses," Research in Economics, Elsevier, vol. 68(3), pages 248-256.
    13. Herzer, Dierk & Klasen, Stephan & Nowak-Lehmann D., Felicitas, 2008. "In search of FDI-led growth in developing countries: The way forward," Economic Modelling, Elsevier, vol. 25(5), pages 793-810, September.
    14. Brülhart, Marius & Sbergami, Federica, 2009. "Agglomeration and growth: Cross-country evidence," Journal of Urban Economics, Elsevier, vol. 65(1), pages 48-63, January.
    15. Yao Yao & Ruhul Salim, 2020. "Crowds in or crowds out? The effect of foreign direct investment on domestic investment in Chinese cities," Empirical Economics, Springer, vol. 58(5), pages 2129-2154, May.
    16. Emre Gökçeli & Jan Fidrmuc & Sugata Ghosh, 2022. "Effect of Foreign Direct Investment on Economic Growth and Domestic Investment: Evidence from OECD Countries," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 8(2), pages 190-216.
    17. Dierk Herzer & Julian Donaubauer, 2018. "The long-run effect of foreign direct investment on total factor productivity in developing countries: a panel cointegration analysis," Empirical Economics, Springer, vol. 54(2), pages 309-342, March.
    18. Oscar Bajo-Rubio & Carmen Diaz-Mora & Carmen Diaz-Roldan, 2010. "Foreign Direct Investment and Regional Growth: An Analysis of the Spanish Case," Regional Studies, Taylor & Francis Journals, vol. 44(3), pages 373-382.
    19. Segundo Camino-Mogro & Natalia Bermúdez-Barrezueta & Mary Armijos, 2023. "Is FDI a potential tool for boosting firm’s performance? Firm level evidence from Ecuador," Journal of Evolutionary Economics, Springer, vol. 33(2), pages 341-391, April.
    20. Chee-Keong Choong, 2012. "Does domestic financial development enhance the linkages between foreign direct investment and economic growth?," Empirical Economics, Springer, vol. 42(3), pages 819-834, June.

    More about this item

    Keywords

    Foreign direct investment; Economic growth; Total factor productivity; Bayesian inference; Dynamic panel data;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:72:y:2018:i:c:p:296-305. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.