Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship

This paper investigates whether foreign direct investment (FDI) affects economic growth based on a panel of data for 84 countries over the period 1970–99. Both single equation and simultaneous equation system techniques are applied to examine this relationship. A significant endogenous relationship between FDI and economic growth is identified from the mid-1980s onwards. FDI not only directly promotes economic growth by itself but also indirectly does so via its interaction terms. The interaction of FDI with human capital exerts a strong positive effect on economic growth in developing countries, while that of FDI with the technology gap has a significant negative impact.