Elboiashi, Hosein A.T.
The effect of FDI and other foreign capital inflows on growth and investment in developing economies.
PhD thesis, University of Glasgow.
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This thesis aims to investigate and study a variety of dimensions of the relationship between foreign direct investment (FDI), domestic investment (DI) and economic growth in the host countries. The main purpose of this thesis is to empirically examine the implications of the
relationship and complementarity between FDI and DI, and the contribution of the host country’s factors in achieving the benefits of FDI inflows.
To achieve the aim and to examine the argument of this thesis, the thesis was structured to include six chapters, containing three empirical chapters. These empirical chapters studied different hypotheses of the relationship between FDI and economic growth. The first empirical
chapter attempted to find the answer to these two questions: (a) does FDI contribute positively
to GDP; and (b) does FDI really crowd out DI in the host countries. The second empirical chapter also tried to offer the answer to this question: does FDI contribute to economic growth in developing countries alone, or does it depend on its initial conditions? Furthermore, the
third empirical chapter studies the direct impact of not only FDI but also other foreign capital inflows on economic growth, and their indirect impact on economic growth, which works via domestic investment channel. This chapter searched for the answer to this question: how do FDI and other types of foreign capital inflows affect economic growth?
Chapter one presents the motivation of the thesis and sets its aim and structure. Chapter two presents a background of economic literature on the relationship between FDI, DI and
economic growth. This chapter also provides a brief review of theoretical and empirical background on the interrelationship between those variables, in order to reach a better understanding of the contributions of FDI and DI to economic growth in the host countries.
Based on this chapter, Chapter three studies empirically the relationship between FDI, DI and economic growth by applying a multivariate VAR system with the error correction model (ECM) and time-series and panel-data techniques of cointegration to investigate the links
between FDI, DI and GDP. The empirical evidence reported in this chapter shows that, on the one hand, FDI crowds out DI in the host countries, either in the short-run or in the long-run based on the results of time-series analysis. On the other hand, Panel-data techniques provide strong evidence that FDI has crowding-in effect on DI. Both time-series and panel-data analysis also provide evidence that FDI can positively affect economic growth in host countries. The results of this chapter also show that GDP have a positive impact on FDI and DI, either in the short-run or in the long-run. The results also show that DI is positively related to GDP and FDI in receiving economies.
Based on the results of Chapter three, Chapter four investigated empirically whether FDI contributes to economic growth alone, or does it depend on the host country’s conditions. The empirical evidence stated in this chapter shows that FDI inflows have, in general, a
significantly positive impact on growth; however, the magnitude of this effect depends on the host country’s absorptive capacity as measured by human capital, technology gap, infrastructure, institution quality, financial market, and trade openness. The results of this
chapter show that the host country must reach a threshold of absorptive capacity in order to gain the positive externalities offered by FDI inflows. The results of this chapter also show that domestic investment, human capital, infrastructure development, financial market development, institution quality, and trade openness are positively related to economic growth, while the technology gap is negatively related to economic growth.
Based on the results of chapter three and four, chapter five explored whether the positive impact of FDI and other foreign capital inflows (portfolio investment and loans inflows) in DI on the host economies can be considered as a growth-enhancing role not only for FDI but also for other foreign capital inflows. The results reported in this chapter show that all types of foreign capital inflows have a significant positive influence on economic growth in the host economies. The empirical evidence reported in this chapter also shows that FDI inflows have a more significant effect on economic growth than other type of capital inflows, such as portfolio investment and loans inflows. The results of this chapter also show that all types of
foreign capital inflows have a strong crowding-in effect on DI in the host countries; however, FDI inflows have a greater crowding-in effect on DI than portfolio investment, and loans inflows are in between them. The main result presented in chapter five is that the impact of FDI, portfolio investment and loans inflows on economic growth, which works via domestic investment channel, is not a significant one, but also is generally greater and more robust than the direct impact in the host economies.
Generally, the most important contribution of this thesis is that a better understanding of the relationship between FDI, DI and economic growth in developing countries, taking into account the influence of the host country’s absorptive capacity, and different types of foreign capital inflows.
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