A Methodological Critique of Foreign Direct Investment in Development Countries

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Many writers have tried to figure out if there is a direct link between Foreign direct investment (FDI) and economic growth of an economy in terms of Gross domestic product (GDP) but a reliable procedure hasn’t been found yet.
Sharma (2008) tends to assume that if more investments take place in developing Countries then there will be an augmenting effect on the economy and likewise if there is little or no FDI then there will be a growth retarding effect.
The first part of the paper tries to see what other authors have to say though we have limited articles regarding Foreign direct investment and economic growth if it has a positive or negative effect, the second part tries to see the methodology used and the final part is based on how the writers arrive at their conclusion and they all agree that there is actually a relationship between FDI and economic growth in developing Countries.
All of the investigations on FDI already make a presumption that FDI causes economic growth and few studies have considered the feedback and the long run equilibrium relationship between FDI and economic growth. Zhang (2001) in his article tries to investigate causality between FDI and economic growth for eleven developing Countries in East Asia and Latin America, based on a theoretical framework and an estimation method that has been developed fairly recently.
In the findings by Zhang(2001), FDI is found to boost economic growth in five of eleven Countries and FDI seems to be more likely to promote economic growth in Countries with liberalized trade regimes, good human capital conditions, large export – oriented FDI and macroeconomic stability. It then went on to discuss the role of FDI in host economies and that recent studies suggests that ...

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...ic growth for 66 developing Countries, taking into account their interaction with exports and technological change and they also conducted time series analysis which is for testing Granger causality in the presence of non stationary time series for each Country and the main findings of this article are that FDI causes growth in several developing Countries but the mechanism through which this works differs across Countries and reverse causality from growth to FDI exists for many Countries. All data used was from World Development Indicator 1998 (WDI,1998). They selected 66 developing Countries for the analysis and for each Country they used time series for four variables and according to their literature, the main channels through which FDI affects growth are capital accumulation, components of the balance of payments, technological change and industrial structure.

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