PANEL DATA ANALYSIS OF FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN DEVELOPING COUNTRIES; POLICY IMPLICATION FOR NEPAL
Abstract
Foreign direct investment (FDI) has increased rapidly in developing countries since the 1990s. Many studiesfound that there is a significant relationship between FDI and economic growth. This thesis seeks to analyze therelationship between FDI and economic growth in developing countries and explore policy implications for theSouth Asian countries and Nepal. The study conducts panel data analyses based on a panel data set of 63 developingcountries in Asia, Africa, and Latin America for the period from 1990-2015. The results of the panel dataanalyses, obtained by the fixed effects, random effects, difference generalized method of moment, DGMM andsystem generalized method of moment, SGMM estimators, show that there is a significant positive effect of FDIon economic growth. It is also found that the FDI-economic growth relationship depends on domestic macroeconomicand financial market conditions, domestic investment climate and infrastructure in host countries.References
Alfaro, L., Chanda, A., Ozan, K.S., and Sayek, S.(2004). FDI and economic growth: the role of local financial markets.
Journal of International Economics Vol 64, 89-112.
Andrés, L., Biller, D., and Dappe, M.H. (2013). Infrastructure Gap in South Asia Infrastructure Needs, Prioritization, and
Financing. Policy Research Working Paper, World Bank Group, 1-37.
Arellano, M., and Bond, S. (1991). Some Test of Specification for Panel Data: Monte Carlo Evidence and an Application
to Employment Equations. Review of Economic Studies, 277-197.
Arellano, M., and Bover, O. (1995). Another look at the Instrumental Variable Estimation of Error-Components Model.
Journal of Econometrics Vol 68, 29-51.
Asokan, P. (2014). Foreign Direct Investment in Developing Countries –A Study concerning the South Asian Countries.
Journal of International Economics Vol 5, 65-77.
Athukorala, P.C., and Wagle, S. (2011). Foreign Direct Investment in South East Asia Is Malaysia falling Behind? ASEAN
Economic Bulletin Vol 28, 115-133.
Athukorala, P.C., and Sharma, K. (2006). Foreign investment in the least Developed:Country: the Nepalese experience.
Transnational Corporations Vol 15, 125-146.
A World Bank Group. (2017). Global Economic Prospects. Washington DC: A World Bank Group.
Balasubramanyam, V.N., Salisu, M.and Sapsford, D. (1996). Foreign Direct Investment and Growth in EP and IS countries.
The Economic Journal Vol 106, 92-105.
Barro, R. J. (1991). Economic Growth in a cross-section of countries. Journal of Economics, 407-443.
Barro R.J., and Xavier, S.-i.-M. (1992). Convergence. Journal of Political Economy Vol 100, 223-251.
Basu, P., Chakraborty, C., and Reagle, D. (2003). Liberalization, FDI, and Growth in Developing Countries: A Panel
Cointegration Approach. Economic Inquiry Vol 41, 510-516.
Batten, J. A., and Vo, X. V. (2010). An Analysis of the Relationship between Foreign Direct Investment and Economic
Growth. Applied Economics Vol 41, 1621-1641.
Bengoa, M. (2008). Differences in the Economic Growth of Latin American Countries. Integration Effects and Foreign
Direct Investment Influence. Investigation Operational Vol 29, 10-25.
Blomstrom, M., Lipsey, R. E., and Zejan, M. (1996). Is Fixed Investment Key to Economic Growth? Quarterly Journal of
Economics Vol 111, 269-276.
Blundell, R., and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of
Econometrics Vol 87, 115-143.
Borenszteina, E., Gregorio, J.D, and Lee, J.W. (1998). How does foreign direct investment affect economic growth?
Journal of International Economics Vol 45, 115-135.
Bornschier, V. (1980). Multinational Corporation and economic growth: A cross National test of the decapitalization thesis.
Journal of Economic Development Vol 7, 191-210.
Busse, M., and Groizard, J. L. (2003). Foreign Direct Investment, Regulation, and growth. The World Economy Vol 31,
-886.
Carp, L. (2012). Analysis of the Relationship between FDI and Economic Growth-Literature Review Study. USV Annals
of Economics & Public Administration Vol 12, 154-160.
Choe, J. I. (2003). Do Foreign Direct Investment and Gross Domestic Investment Promote Economic Growth? Review
of Development Economics Vol 7, 44-57.
Choong, C.K., Yuso, Z., and Soo, C.S. (2004). Foreign Direct Investment, Economic Growth, and Financial Sector
Development A Comparative Analysis. ASEAN Economic Bulletin Vol 21, 278-289. 109
CEA Journal of Economics
Chowdhury, A., and Mavrotas, G. (2003). FDI and Growth: What Causes What? World Economy, 9-19.
DeMello, L.J. (1997). Foreign Direct Investment in Developing Countries and Growth: A selective survey. The Journal of
Development Studies Vol 34, 1-34.
DeMello, L. J. (1999). Foreign Direct Investment-led Growth: Evidence from time series and panel data. Oxford
Economic Papers Vol 51, 133-151.
Dunn, C. C. (1975). The Effects of International Economic Dependence on Development and Inequality: A Cross-
National Study. American Sociological Review Vol 40, 720-738.
Dunning, J. (1997). How Should National Government Respond to Globalization? The International Executive Vol 39, 55-
Durham, J. B. (2004). Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment
on economic growth. European Economic Review vol 48, 285-306.
Faruq, H., A., and Telaroli, P. J. (2011). Factor affecting Manufacturing and agriculture productivity trends among Asian
countries. ASEAN Economic Bulletin Vol 28, 45-60.
Felipe, J. (1999). Total Factor Productivity Growth in East Asia: A Critical Survey. The Journal of Development Studies
Vol 25, 1-41.
Findlay, R. (1978). Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: a simple
Dynamic Model. The Quarterly Journal of Economics Vol 92, 1-16.
Gocer, I, and Mercan, M. (2014). Effect of Foreign Direct Investments on the Domestic Investments of Developing
Countries: A Dynamic Panel Data Analysis. Journal of Economic and Social Studies vol 4, 73-90.
Haji, M.H, Low S.W., Shaari, A.H., and Ghazali, N.A. (2013). FDI and Economic Growth--Does the Quality of Banking
Development Matter? Gadjah Mada International Journal of Business Vol15, 287-303.
Harmen, N., and Lensik, R.. (2003). Foreign Direct Investment, Financial development, and economic growth. Journal
of development studies Vol 40, 142-163.
Hausman, J.A. (1978) Specification Test in Econometrics. Econometrica Vol46 1251-1272
Hudea, O. S., and Stanchu, S. (2012). Foreign Direct Investments- A Force to Driving to Economic Growth. Evidence
from Eastern European Countries. Economic Computation & Economic Cybernetics Studies & Research Vol 46, 105-
Imtiaz S., and Bashir M. F. (2017). Economic freedom and foreign direct investment in South Asian countries. Theoretical
and Applied Economics, 277-290.
International Monetary Fund. (2009). Balance of Payments and International Investment Position Manual. New York:
International Monetary Fund.
BIBLIOGRAPHY Kentor, J. (1998). The Long-Term Effects of Foreign Investment Dependence on Economic Growth,
–1990. American Journal of Sociology Vol 103, 1024-1046
Kizilkaya, O, Ahmet, A., and Akar, G.(2016). Dynamic relationship among foreign direct investments, human capital, economic
freedom and economic growth: Evidence from panel cointegration and panel causality analysis. Theoretical and
Applied Economics Vol 23, 127-140.
Kotrajaras, P., Tubtimtong, B., W.P. (2011). Does FDI Enhance Economic Growth? New Evidence from East Asia.
ASEAN Economic Bulletin Vol 28, 183-202.
Krishna M. K., D. B. (2008). The Role of FDI in High Medium, Low Medium, and Low-Income Countries during 1970 -
: Empirical Tests and Evidence. Journal of Business & Economics Studies Vol 14, 60-72.
Lall, S. and Narula, R. (2004). Foreign Direct Investment and its Role in Economic Development: Do We Need a New
Agenda? The European Journal of Development Research, Vol 16, 447-464.
Lucas, R. E. (1988). On the Mechanics of Economic Development. Journal of Monetary Economics Vol 22, 3-42.
Mahmudul, A, and Chiang, S. H. (1993). Foreign Investment and optimum terms of technology 110 transfer. Canadian
PANEL DATA ANALYSIS OF FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN DEVELOPING...
Journal of Economics vol 93, 976-983.
Ministry of Finance, Nepal. (2016). Economic Survey. Kathmandu: Ministry of Finance, Nepal.
Ministry of Finance, Nepal. (2017). Budget Speech. Kathmandu: Ministry of Finance, Nepal.
Nasser, O. M. (2007). The Determinants of the U.S. Foreign Direct Investment: Does the Region Matter? Global
Economic Review, 37-51.
Nasser, O. M. (2010). How Does Foreign Direct Investment Affect Economic Growth? The Role of local conditions. Latin
American Business Review, 111-139.
National Planning Commission, Nepal. (2017). 14th Periodic Plan. Kathmandu: National Planning Commission, Nepal.
Nolan, P, Willian, B. (1983). Competition and Workplace wage discrimination. Oxford Bulletin of Economics and Statistics
Vol 45, 269-287.
Nwala, K. (2008). The Relationship between U.S. Direct Investment and Economic Growth in Some Selected Asian
Countries. North American Journal of Finance and Banking Research Vol 2, 13-25.
Organization for Economic Co-operation and Development. (2008). OECD Benchmark Definition of Foreign Direct
Investment. Paris: OECD.
Ozturk, I. (2007). Foreign Direct Investment- Growth Nexus: A Review of the Recent Literature. International Journal of
Applied Econometrics and Quantitative Studies Vol 4, 79-98.
Reichert, U.N., and Weinhold, D. (2001). Causality Tests for Cross-Country Panels: a New Look at FDI and Economic
Growth in Developing Countries. Oxford Bulletin of Economics & Statistics vol 63, 153-171.
Romer, P. (1986). Increasing return and Long-run Growth. Journal of Political Economy Vol 94, 1002-1037.
Roodman, D. (2006). An Introduction to "Difference" and "System" GMM in state. Working paper Center for Global
Development, 1-50.
Seyoum, M., Lin, J., and Wu, R., (2015). Foreign Direct Investment and Economic Growth: The Case of Developing
African Economies. Social Indicators Research Vol 122, 45-64.
Sivalogathasan, V., and Wu, X. (2014). The Effect of FDI on innovation in South Asian Emerging Market. Global Business
and Organizational Excellence, 63-76.
Srivastava, S., and Sen, R. (2004). Competing for Global FDI: Opportunities and Challenges for the Indian Economy.
South Asia Economic Journal, 233-260.
Stonemen, C. (1975). Foreign capital and Economic Growth. World Development Vol 3, 11-26.
Tavakoli, O. M. (2003). Does Foreign Direct Investment Cause a Race to the Bottom? Journal of the Asia Pacific
Economy vol 8, 133-156.
Thangavelu, S.M. Yong, Y.W., and Chongvilaivan A. (2009). FDI, Growth and the Asian Financial Crisis: The Experience
of Selected Asian Countries. The World Economy Vol 32, 1461-1477.
The World Bank. (2016). Annual Report 2016. Washington DC: The World Bank.
UNCTAD. (2015). World Investment Report. Washington DC: United Nations Conference on Trade and Development.
United Nations Conference on Trade and Development. (2017). World Investment Report. New York: United Nations.
Vadlamannati, C K., Tamazian, A., and Irala, R.L. (2009). Determinants of foreign direct investment and volatility in South
East Asian Economies. Journal of the Asia Pacific Economy Vol 14, 246-261.
Vogiatzoglou, K. (2016). Ease of Doing Business and FDI inflows in ASIAN. Journal o f Southeast Asian Economies Vol
, 343-363.
Walz, U. (1997). Innovation, Foreign Direct Investment, and Growth. Economica Vol 64, 63-79.
Wang, M. (2009). Manufacturing FDI and Economic Growth: Evidence from Asian Economies. Applied Economics vol
, 991-1002. 111
CEA Journal of Economics
Wu, V. S. (2014). The Effect of Foreign Direct Investment on Innovation in South Asian Emerging Markets. Global
Business and Organizational Excellence Vol 33, 63-76.
Zhang, K. (2003). Foreign Direct Investment in China. Asian Economic and Political Issues Vol 8, 1-18.
Zhang, K. H. (2001). Does Foreign direct investment promote growth: Evidence from East Asia and Latin America.
Contemporary Economic Policy Vol 19, 175-185.
