Archived — Research Summaries: Working Paper 2008-01: Does FDI Accelerate Economic Growth? The OECD Experience Based on Panel Data Estimates for the Period 1980–2004

by Madanmohan Ghosh and Weimin Wang

Foreign direct investments (FDI) play an important role as an engine of economic growth. However, although empirical literature offers rich insights on the relationship of FDI and economic growth, it provides mixed evidence on the existence of productivity externalities in the host country generated by foreign multinational companies. A branch of literature suggests that the positive impact of FDI is conditional on countries' stock of human capital or a threshold absorptive capacity.

But, most of the studies that come up with such conclusions are either based on developing or a mix of developing and developed country experiences. There is a dearth of literature explicitly focussed on developed country experiences. Moreover, the literature seems to have focussed only on the impact of inward FDI on host country economic growth. Does outward FDI exert any influence on source country economic growth? This paper addresses both these issues. In a cross-country regression framework using panel time series data from 25 Organisation for Economic Co-operation and Development countries for the period 1980–2004, it finds that both inward and outward FDI are positively correlated with host and source country economic growth. However, the impact of FDI on economic growth is moderate. Results suggest the elasticity of gross domestic product growth with respect to both inward and outward FDI in the host and source countries is about 0.01.

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