Foreign direct investment and economic growth an increasingly endogenous relationship

foreign direct investment and economic growth an increasingly endogenous relationship

The impact of foreign direct investment (FDI) on economic growth is of Growth : An increasingly Endogenous Relationship” World Development 33(3). The relationship between FDI and economic growth has attracted considerable attention over the years. Despite the growth by increasing the amount of investable capital, and by using the exogenous and endogenous growth models;. Findlay, Ronald (), Relative Backwardness, Direct Foreign Investment and the and Economic Growth: An Increasingly Endogenous Relationship, World.

The foreign direct investment inflows in Africa is the lowest comparing to other regions, even it increased in recent decades but still lower in the world [ 3 ]. Attracting more FDI flows to come-in the region needs more improvement in the business environment such as human capital and infrastructure to gain more advantages from the FDI spillover effects [ 45 ].

Business environment in African countries is inadequate, since the infrastructure stock and human capital are too low comparing to other regions See doing business report It is most important thing to understand the nature of the impact of FDI and business environment on economic growth.

The recent studies are less-focused in African countries, for example [ 6 - 13 ] studied the relationships of interest in different regions, while the studies in Africa are quite rare. So it is very important to fill the gap in addressing this issue in Africa to help policy-makers to develop and introduce effective polices to grow the economy of the region.

From this end, the aim of this study is to examine the relationships between foreign direct investment, business environment and economic growth. The rest of the paper organized as follows. Section 2 literature review, Section 3 outlines our empirical strategy, which encompasses specifying an appropriate dynamic model, econometrics method and describes the various data sets that are utilized in the methodology.

Section 4 reports and discusses the econometric results, reports robustness checks, makes comparisons to related literature. Finally, Section 5 summary and conclusion. Literature Review The ideas that FDI led economic growth, business environment positively contribute to economic growth remains extremely controversial.

foreign direct investment and economic growth an increasingly endogenous relationship

Theoretically, economic growth is a well-studied issue. The role of technological progress has been included in the production function as a determinant of the growth by [ 14 ] that is devoted a model of longrun growth to include the price-wage-interest reactions, interest-elastic savings schedule and allowed for the neutral technological change.

Extend the Solow model to include the human capital accumulation through years of schooling in the production function [ 15 ].

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Closely following the work of Solow, Lucas examined the interaction of physical and human capital accumulation on growth. The inclusion of the education human capital in the growth model continued in the work of [ 16 - 18 ] and expanded to include the health human capital in the production function as an important determinant of economic growth [ 19 - 21 ]. In-other side, there are two main theories in the impact of investment on growth which are the Modernization theory and the Dependency theory.

foreign direct investment and economic growth an increasingly endogenous relationship

The Modernization theory insists that the Third World is underdeveloped and remains in such a state because of its historical failure to industrialize and modernize with technology, the theory consider the lack of the finance as a one of the reasons associated with the failure of those countries.

One of the solutions provided by this theory is the foreign direct investment which assumed to have positive impact on economic growth.

The Dependency Theory however, is opposed to all the assessments and solutions offered by the Modernization Theory. The Dependency Theory argues that the plight of the Third Worlds as a result of the rapid economic growth and economic development in the First World countries.

Thus, the theory believes-in the negative effects of the foreign direct investment on the economic growth [ 2223 ]. Empirically, the impact of FDI on growth is subject to the level of existing business environment in the host country. For-instance, [ 11 ] found that FDI by itself have a positive significant impact on growth but countries with well-developed financial market benefits more from FDI.

Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship

The pervious finding has been confirmed by [ 1 ] they resulted that the positive impact of FDI on economic growth kicks-in only after financial market development exceeds a threshold level, until then the benefits of FDI is non-existent. Moreover, FDI by itself can contribute positively to economic growth and its impact is not subject to a particular environment [ 424 ]. Moving-forward, the impact of FDI on growth has found to be insignificant in the short-run and the long run as well [ 2 ].

A different view has been added to the previous results, which is that FDI have a negative impact on economic growth [ 2526 ], they justified their finding due to the technology-gap and poor business environment in the countries of interest.

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Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship

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foreign direct investment and economic growth an increasingly endogenous relationship

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