Foreign direct investment, total factor productivity, and economic growth: evidence in middle-income countries

Abstract This study examines the relationship between foreign direct investment and total factor productivity on economic growth in 90 middle-income countries. Because middle-income countries often face particular challenges in achieving sustainable economic development. Investigating how FDI and TFP contribute to or hinder economic growth in these countries can provide insight and help policymakers make policy decisions. We employ the dynamic system Generalized Method of Moments to analyze an unbalanced sample with 2714 annual observations from 1990 to 2020. The empirical results show that a percentage increase in foreign direct investment will increase economic growth in middle-income countries by 9.3%. In addition, Total Factor Productivity also has a positive relationship with economic growth due to improved labor quality and production innovations. Furthermore, the results indicate that Total Factor Productivity empowers the positive nexus between Foreign Direct Investment and economic growth. In addition, the main findings are also robust even though we employ alternative economic growth proxies. These findings support economic growth and industrialization theories but do not support labor market dynamics theories. Finally, this study contributes practical suggestions for sustainable economic development in middle-income countries.