Do surges in foreign direct investment inflows lead to surges in economic growth? Evidence from developing countries
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 21 September 2020
Issue publication date: 7 June 2021
Abstract
Purpose
The purpose of this paper is to examine whether surge in foreign direct investment (FDI) inflows leads to surge in economic growth in 52 developing countries for the period 1990-2014.
Design/methodology/approach
The author used a threshold approach to identify surge incidences in gross domestic product (GDP) per capita growth rates and FDI inflows (measured as percentage of GDP) for each country included in the sample. Three different criteria are used to identify surge instances. As a preliminary analysis the author used the probit and complementary log–log regression methods to estimate the likelihood of growth surge occurrence. To correct the potential endogeneity problem the author jointly estimated the growth surge and FDI surge equations using the recursive bivariate probit (RBP) regression.
Findings
The author found that East Asia and the Pacific region has highest rate of growth surge incidences followed by South Asia. The results suggest that surge in FDI inflows significantly increases the likelihood of growth surge. The finding is robust to alternative surge definitions and methods of estimation.
Practical implications
The analysis reveals that inbound FDI flow is a critical driver of economic growth in developing countries. Large FDI inflows matters for achieving rapid economic growth. Therefore developing countries should adopt favourable policies to attract more FDI. Policymakers should focus on improving the investment climate of the country to boost domestic investment and to attract larger amount of FDI into the economy.
Originality/value
To the best of the author’s knowledge this is the first study to examine whether surge in FDI inflows stimulates surge in economic growth in developing countries. The analysis reveals that FDI surge is a robust predictor of rapid economic growth in developing countries.
Keywords
Acknowledgements
This paper is based on the author’s PhD work at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.
The author would like to thank Professor Pradipta Chaudhury and Professor Sabyasachi Kar for their valuable comments. An earlier version of this paper was presented at the 13th BMEB International Conference, Bali 2019. The author would like to thank the participants of the 13th BMEB International Conference and the anonymous reviewers for their useful comments that helped improve this paper. The usual disclaimer applies.
Funding: The author received no financial support for the research, authorship and/or publication of this paper.
Citation
Sahu, J.P. (2021), "Do surges in foreign direct investment inflows lead to surges in economic growth? Evidence from developing countries", Studies in Economics and Finance, Vol. 38 No. 2, pp. 317-338. https://doi.org/10.1108/SEF-10-2019-0418
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited