Are Absorption Capacities Relevant In The FDI-Growth Nexus?

This paper attempted to address two questions: (1) Does foreign direct investment (FDI) influence economic growth in emerging markets? and (2) Are there preconditions that must be available in emerging markets before FDI influence economic growth? The second question was triggered by literature which says that certain conditions must exist in the host country before economic growth triggered by FDI occurs (Azam and Ahmed. 2014; Pegkas. 2015). Literature shows that FDI led growth nexus has been extensively researched on and is now a settled matter. What is still unclear is which ones are the preconditions that must exist in the host countries to allow significant FDI impact on economic growth. Few empirical studies on the subject matter shows that there is no consensus yet on the list of conditions which must be available in the host countries before FDI triggered economic growth advantages are felt (refer to Table 1). Such empirical studies shied away from emerging markets despite the fact that emerging markets were major recipients of FDI in the last two decades as confirmed by Cavusgil et al (2013). It is against this background that the author investigated whether financial development, trade openness and infrastructural development are preconditions that are necessary for emerging markets to enjoy FDI triggered economic growth benefits. Panel data analysis methods, namely pooled ordinary least squares (OLS), fixed and random effects with data ranging from 1996 to 2014 were used for the current study. Fixed and random effects found out that financial development and infrastructure development are absorption capacities which should be available in the emerging markets if economic growth is to be significantly influenced by FDI. Pooled OLS observed that only trade openness and infrastructural development must be available in emerging markets before FDI significantly influence growth. The policy implication of the study is that emerging markets should implement policies that increase financial development, trade openness and infrastructural development in order to enhance FDI’s ability to influence economic growth. Future studies should investigate all factors raised by literature to find out if they are absorption capacities in the FDI-growth nexus in emerging markets.