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FDI and Growth: What Causes What?

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  • Abdur Chowdhury
  • George Mavrotas

Abstract

This paper examines the causal relationship between FDI and economic growth by using an innovative econometric methodology to study the direction of causality between the two variables. We apply our methodology, based on the Toda‐Yamamoto test for causality, to time‐series data covering the period 1969–2000 for three developing countries, namely Chile, Malaysia and Thailand, all of them major recipients of FDI with a different history of macroeconomic episodes, policy regimes and growth patterns. Our empirical findings clearly suggest that it is GDP that causes FDI in the case of Chile and not vice versa, while for both Malaysia and Thailand, there is a strong evidence of a bi‐directional causality between the two variables. The robustness of the above findings is confirmed by the use of a bootstrap test employed to test the validity of our results.

Suggested Citation

  • Abdur Chowdhury & George Mavrotas, 2006. "FDI and Growth: What Causes What?," The World Economy, Wiley Blackwell, vol. 29(1), pages 9-19, January.
    • Handle: RePEc:bla:worlde:v:29:y:2006:i:1:p:9-19
    DOI: 10.1111/j.1467-9701.2006.00755.x
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    1. Tony Addison & Almas Heshmati, 2003. "The New Global Determinants of FDI Flows to Developing Countries: The Importance of ICT and Democratization," WIDER Working Paper Series DP2003-45, World Institute for Development Economic Research (UNU-WIDER).
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    4. Klein, Michael & Aaron, Carl & Hadjimichael, Bita, 2001. "Foreign direct investment and poverty reduction," Policy Research Working Paper Series 2613, The World Bank.
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