DOES FOREIGN DIRECT INVESTMENT PROMOTE ECONOMIC GROWTH? EVIDENCE FROM EAST ASIA AND LATIN AMERICA

Abstract

Although there is considerable evidence on the link between foreign direct investment (FDI) and economic growth in developing countries, causal patterns of the two variables has not been investigated yet with a reliable procedure. This article provides an empirical assessment of the issue by using data for 11 economies in East Asia and Latin America. Although FDI is expected to boost host economic growth, it is shown that the extent to which FDI is growth‐enhancing appears to depend on country‐specific characteristics. Particularly, FDI tends to be more likely to promote economic growth when host countries adopt liberalized trade regime, improve education and thereby human capital conditions, encourage export‐oriented FDI, and maintain macroeconomic stability.