Economic Growth
Teymour Rahmani; sima Motamedi
Volume 8, Issue 30 , April 2018, , Pages 117-132
Abstract
The relationship between foreign direct investment and economic growth is an issue that has always been of importance for economists. It is believed that foreign direct investment (FDI) is necessary to promote economic growth and capital formation in every country, particularly in the developing countries. ...
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The relationship between foreign direct investment and economic growth is an issue that has always been of importance for economists. It is believed that foreign direct investment (FDI) is necessary to promote economic growth and capital formation in every country, particularly in the developing countries. Since it has been discussed that FDI promotes economic growth not only by increasing the volume of financial funds and relaxing the constraint on investment financed by domestic savings but also by technology and management skills transfer from advanced economies to developing economies in the context of endogenous growth models, it is necessary to examine the effect of FDI on economic growth via the above mentioned channels. In this study, we examine the effects of FDI on capital formation, labor productivity and economic growth. We try to test the hypothesis that FDI helps economic growth in developing countries not only via capital formation but also via the increase in productivity. To test this hypothesis, we use a panel data approach in a simultaneous equations system including three equations and three groups consisting of 111 developing countries over the time period 1995-2013. Our method of estimation is 2SLS. Our results show that in the sample we have examined, productivity has a higher effect on economic growth than capital formation. Therefore, the hypothesis that “FDI, by increasing productivity, has a positive effect on economic growth” is not rejected.
