The Impact of Foreign Direct Investment on Economic Growth
Model and Methodology
The dependent variable is the average annual growth rate of real per capita GDP. The theoretical model is developed by incorporating elements that capture the overall macroeconomic development, such as market openness, inflation, political risk index, financial market capitalization, education, corruption perception index, openness, and effective exchange rate. FDI is incorporated as a growth driver to control these elements. The chosen dataset allows the researcher to explore cross-country dimensions and time-variant features (Aga, 2014). Income level identifiers and institutional environment is added to further enrich the model. The analysis of the effects of FDI is first based on the argument that the total investment (It) in a country is made up of the sum total of the real investment undertaken by MNEs (If) and that of domestic investment (Id). Therefore,
It=Id+If
Looking at FDI from the perspective of the host countries, investments can be considered an exogenous variable since it depends on different variables such as MNE strategies and the world economy (Sohail & Mirza, 2020). A cross-sectional study of data from 100 countries will be analyzed over a period of 20 years (1998-2018). Overall, the research will employ the below model to assess the impact of FDI on economic growth;
y= βIf/Y+Fx+Oi+K+Bc+Id/Y+Fx+i+Pi+Ci
Where; y=average annual growth rate of real per capita GDP
Y=GDP
Oi=Openness index
K=financial market capitalization
Bc=Bank credit
Fx=real effective exchange rate
i=Inflation
Pi=Political risk index
Ci=Corruption perception index
β=coefficient illustrating the effect of particular variables on the level of economic development.
The null hypothesis for the study is that there is no positive relationship between FDI and economic growth. The model is based on the endogenous growth theory. According to this approach, economic growth is generated as a result of an internal process (Madsen, Saxena & Ang, 2010). As a result, a country realizes economic growth due to the development of new technologies as well as efficient and effective means of production. Models based on the cross-sectional study will be estimated using the Ordinary Least Square (OLS). Robust HCs standard errors will be applied to determine the significance of the estimates (Hlavacek & Bal-Domanska, 2016). The methodology provides an alternative bias correction for variance calculation. Data estimates predict that all explanatory variables will present a statistically significant relation with real GDP per capita changes (Anwar & Nguyen, 2010). The elasticity of FDI with regard to GDP changes is expected to range between 0.5% and 1.0%.
Data Sources
A comprehensive database covering a wide geographical area with global coverage will be compiled to perform the empirical study. The data will be obtained from sources deemed reliable and credible.
| Variable | Data Source | Link |
| The average annual growth rate of real per capita GDP
|
World development indicators | https://databank.worldbank.org/source/world-development-indicators
|
| Foreign direct investment | Financial development index | https://datacatalog.worldbank.org/dataset/global-financial-development |
| Real effective exchange rate | The world Bank | https://databank.worldbank.org/home.aspx |
| Trade openness index | The world Bank | https://www.doingbusiness.org/en/custom-query |
| Financial market capitalization | Financial development index | https://datacatalog.worldbank.org/dataset/global-financial-development |
| Bank Credit | The world Bank | https://databank.worldbank.org/home.aspx |
| Education | https://databank.worldbank.org/source/education-statistics-%5e-all-indicators
|
|
| Inflation | The world Bank | https://databank.worldbank.org/home.aspx |
| Domestic investment | World development indicators | https://databank.worldbank.org/source/world-development-indicators
|
| Political risk index | The worldwide Governance indicators (WGI) | https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators
|
| Corruption perception index | Transparency international | https://www.transparency.org/research/cpi/overview
|
In the long run, FDI is expected to have an inverse relationship with economic growth. In the study model, therefore, FDI per capita will have a negative sign. In terms of gross domestic investment Id, it is expected that Id will have a positive relationship with economic growth. On the other hand, Inflation will have a negative relationship with real GDP per capita since high levels of inflation translate to escalating levels of economic problems.
References
Aga, A. A. K. (2014). The impact of foreign direct investment on economic growth: A case study of Turkey 1980–2012. International Journal of Economics and Finance, 6(7), 71-84.
Anwar, S., & Nguyen, L. P. (2010). Foreign direct investment and economic growth in Vietnam. Asia Pacific business review, 16(1-2), 183-202.
Hlavacek, P., & Bal-Domanska, B. (2016). Impact of foreign direct investment on economic growth in Central and Eastern European countries. Engineering Economics, 27(3), 294-303.
Madsen, J. B., Saxena, S., & Ang, J. B. (2010). The Indian growth miracle and endogenous growth. Journal of development economics, 93(1), 37-48.
Sohail, S., & Mirza, S. S. (2020). Impact of foreign direct investment on the economic growth of Pakistan. Asian Journal of Economics, Finance, and Management, 1-13.