Working Paper: CEPR ID: DP17692
Authors: Agustin Benetrix; Hayley Pallan; Ugo Panizza
Abstract: This paper revisits the link between FDI and economic growth in emerging and developing economies. When we study the early decades of our sample, we find that there is no statistically significant correlation between FDI and growth for countries with average levels of education or financial depth. In line with previous contributions, we find that this correlation is positive and statistically significant for countries with sufficiently well-developed financial sectors or high levels of human capital. However, we also find that the link between FDI and growth varies over time. For more recent periods, we find a positive and statistically significant relationship between FDI and growth for the average country, with local conditions having a {\it negative} effect on this link. We also develop a novel instrument aimed at addressing the endogeneity of FDI inflows. Instrumental variable estimates suggest that our results are unlikely to be driven by endogeneity.
Keywords: FDI; Economic Growth; Human Capital; Financial Development
JEL Codes: F21; F43; C21; C26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average levels of education or financial depth (I24) | no correlation with FDI and growth (F21) |
| local conditions (C62) | negatively affect link between FDI and growth (F64) |
| human capital and financial depth (O16) | mediating effects no longer hold post-1990 (F69) |
| high levels of education or financial depth (I24) | negative relationship between FDI and growth (F64) |
| FDI (F23) | economic growth (O49) |
| well-developed financial sectors or high levels of human capital (O16) | positive correlation with FDI and growth (F64) |
| recent periods (N94) | positive relationship between FDI and growth (F21) |