The Influence of FDI on Economic Growth Under the Endogenous Growth Model

We examined the interaction between Foreign Direct Investment (FDI) and Economic Growth (EG), which has been an area of interest for both academics and policy makers since the early 1990s, with most scholars concluding that FDI has a positive impact on EG through the enhancement of capital, technology and human capital. However, the ability of FDI to catalyze growth varies with the policies and institutions of the host economy. In pursuing this objective, this study seeks to assess the long-run effectiveness of FDI in the growth of EG, using a dynamic panel econometric model predicated on the endogenous growth model. Some of the independent variables tested in the analysis are FDI to GDP ratio, institutional quality indices and the macroeconomic variables to give a broader view on the issue. The findings reveal that the effect of FDI on EG is positively improved by enhanced institutional quality in reference to better governmental and business liberalization. There is a positive and statistically significant impact of governmental freedom on the relationship between FDI and EG where a 1% improvement in governmental freedom raises the effect of FDI on EG by 0.36%. However, the same improvement in business freedom raises this effect by only 0.08%. On the other hand, FDI inflows uncertainty, which is likely to erode these positive growth advantages, is negatively related with, and signifies by 0.028% points less impact in EG for every 1% increase in FDI volatility.