The relationship of FDI with GDP growth in selected frontier markets

Abstract

The main purpose of this study is to understand the contribution of inward flows of foreign direct investment to host country economic growth, with particular attention being given to the Latin American region. The examination is worthwhile undertaking for a variety of reasons. For instance, if higher levels of foreign investment are found to generate more output in an economy, then governments should aim to attract more foreign capital through the implementation of policies which would be beneficial for the mobility of multinationals. If the effect is found to be deleterious, the opposite is true. Finally, if production growth is found to be exogenous of foreign capital flows, then special treatment being given to such type of capital influx would be unsubstantiated. Growth data for the Latin American frontier markets of Argentina, Brazil, Mexico, Colombia and Peru for the time period of 1976 to 2011 was regressed on a set of endogenous variables identified as factors which could realistically impart an effect on productivity. The results were then analysed in order to discern whether increases in the net inflows of foreign direct investment lead to enhanced economic growth per capita. Whilst the variable for direct foreign investment was not found to exert an independent growth effect on gross domestic product per capita, the proxy for trade openness was found to be negative and significant, inferring that an increase in exports and imports may lead to greater economic prosperity. This is because a smaller value for the ratio of exports and imports to gross domestic product implies a proportionately larger increase in growth to increments in the summation of exports and imports. The population's life expectancy for Brazil and Colombia also proved to have some significant positive impact. From all the studies reviewed, the results attained seem to be most closely related to those achieved by Carkovic and Levine (2002) which do not find foreign direct investment to be unimportant, but rather, that the findings support a reduced confidence in the belief that it accelerates growth. While sound economic policies may spur both growth and foreign capital investment, the results obtained are inconsistent with the view that stock of foreign investment exerts a positive impact on growth that is independent of other capacity determinants.