Graduate Program

Economics

Degree Name

Master of Arts (MA)

Semester of Degree Completion

2005

Thesis Director

Mukti Upadhyay

Thesis Committee Member

Ali Moshtagh

Thesis Committee Member

Mark Bates

Abstract

The role of Foreign Direct Investment (FDI) in developing countries has become increasingly important. This thesis provides a statistical analysis of the relationship between FDI and economic growth in developing countries. First of all, this thesis tests for Granger causality between two variables: FDI which is the net inflow of foreign direct investment as a percent of GDP, and GDP itself. The sample is a panel data set consisting of 40 countries with a time period of 22 years. We also classify countries in the data set by geographic region.

The objective of this study is to explore a two-way causality running between economic growth and FDI growth in developing countries. However, the results can not offer the support, in the sense of a bi-directional causal ordering, for the FDI-led growth and growth-driven FDI hypothesis.

Secondly, the conventional approach to investigating the relationship between growth and FDI involves running regressions for the rate of output growth on the rate of FDI growth. By using full sample and sub-sample databases on the effect of FDI in economic growth, it is determined that FDI inflows do not exert an independent influence on economic growth and insignificant impact of export rate on GDP growth.

Finally, economic growth needs capital investment. Many developing countries have been aggressive in their efforts to attract FDI. Using fixed effects panel regressions, this thesis explores whether the stylized determinants of FDI affect FDI flows to the developing countries. Panel data of 40 developing countries from 1980 through 2002 (three years average at 7 periods) are used to analyze the factors determining foreign direct investment.

Compared with several other studies, the empirical results in this thesis confirm the importance of the usual determinants of FDI in whole developing countries.

This study also demonstrates that Middle East countries, Latin America and Asian countries are different from full sample of countries with regard to FDI flows.

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