Empirical Evidence on the Relationship between Foreign Direct Investment and Economic Growth: A Cross-Country Exploration in Asia
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The issue of capital flows is considered to be the most accessible route for economic growth whereby investment is regarded as the engine of growth. The worldwide changes have recognized the importance of Foreign Direct Investment (FDI) as one of the possible options to stimulate growth momentum. Against this backdrop this paper examines the short run and long run dynamics between economic growth and foreign direct investment for selected Asian economies covering the period from 1975 to 2010. A neo-classical production function is estimated to capture the short run dynamics followed by cointegration technique to capture the long run effect. This paper provides strong evidence regarding the existence of long run equilibrium relationship between FDI and growth for majority of the countries followed by varied causality between foreign direct investment and economic growth. The policy recommendations may not be uniform for the entire Asian region due to their diversified industrialization experience.
Abstract
The issue of capital flows is considered to be the most accessible route for economic growth whereby investment is regarded as the engine of growth. The worldwide changes have recognized the importance of Foreign Direct Investment (FDI) as one of the possible options to stimulate growth momentum. Against this backdrop this paper examines the short run and long run dynamics between economic growth and foreign direct investment for selected Asian economies covering the period from 1975 to 2010. A neo-classical production function is estimated to capture the short run dynamics followed by cointegration technique to capture the long run effect. This paper provides strong evidence regarding the existence of long run equilibrium relationship between FDI and growth for majority of the countries followed by varied causality between foreign direct investment and economic growth. The policy recommendations may not be uniform for the entire Asian region due to their diversified industrialization experience.
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