Skip to main content
SpringerLink
Log in

Does foreign direct investment cause long run economic growth? Evidence from the Latin American and the Caribbean countries

  • Original Paper
  • Published:
International Economics and Economic Policy Aims and scope Submit manuscript

Abstract

The empirical evidence about the temporal precedence between foreign direct investment (FDI) and economic growth in open developing economies is mixed. In this research effort, we explored the FDI-growth nexus for 16 developing countries of Latin American and the Caribbean countries during the last three decades, a period in which many of these countries introduced various economic and financial reforms. As a departure from many previous studies, the current analysis uses the Granger noncausality test procedure recently developed by Toda and Yamamoto (J Econ 66:225–250, 1995), and Dolado and Lutkepohl (Econ Rev 15:369–386, 1996)–TYDL. Our results suggest that the null hypothesis that ‘FDI does not Granger cause economic growth’ is rejected for all countries except Dominican Republic, Trinidad and Tobago, and Jamaica. There is also evidence of unidirectional causality from growth to FDI for all countries except Bolivia, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, and Jamaica. We found bidirectional causality for Argentina, Brazil, Mexico, Peru and Venezuela.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Some recent studies include World Bank (2009), Basu et al. (2003), Harmes and Lensink (2003), Alfaro et al. (2004), Chowdhury and Mavrotas (2005)) among others.

  2. Hanson (2001), De Backer and Sleuwagen (2003), and Carcovic and Levine (2005)

  3. For discussion on these requirements see OECD (2002), Lipsey (2002), Alfaro et al. (2004), and Fortanier (2007) among others

  4. Also, FDI may have a negative effect on growth prospect of the recipient economy if they give rise to substantial reverse flows in the form of profit remittances, dividends and if the transnational corporations obtain concessions from the host country.

  5. See Toda and Yamamoto (1995; pp 230–233) for proving this process. Also, Dolado and Lutkepohl (1996)

  6. The lack of causality between FDI and growth in these countries might not be unconnected to the postulations by Borensztein et al. (1998) and Balasubramanyan et al. (1996). Borensztein et al. (1998) argued that the spillover effect of FDI on economic growth can only be successful if certain characteristics exit in the host country. They show that adoption of new technologies and management skills is possible only when there is a certain minimum or threshold level of human capital available in the host country. Further, Balasubramanyan et al. (1996) opine that the process of technologies spillover may be more efficient in the presence of well functioning markets. The absence of these characteristics in some developing countries under investigation may partly explain why FDI does not cause growth in these countries.

References

  • Alfaro L, Chanda A, Kalemli-Ozcan S, Sayek S (2004) FDI and economic growth: the role of local financial markets. J Int Econ 64(1):113–134

    Article  Google Scholar 

  • Balasubramanya VN, Salisu M, Sapsford D (1996) Foreign direct investment and growth in EP and IS countries. Econ J 106(No 1):92–105

    Article  Google Scholar 

  • Basu P, Chakraborty C, Reagle D (2003) Liberalization, FDI, and growth in developing countries: a panel cointegration approach. Econ Inq 41(3):510–516

    Article  Google Scholar 

  • Blomstrom M, Lipsey RE, Zejan, M (1994) What explains developing country growth? NBER Working Papers No 4132, National Bureau of Economic Research

  • Boresztein EJ, Gregorio D, Lee JW (1998) How does foreign direct investment affect economic growth? J Int Econ 45:115–135

    Article  Google Scholar 

  • Buckley P, Clegg J, Wang C, Cross C (2002) Foreign direct investment, regional differences and economic growth: panel data evidence from China. Transl Corp 11(No. 1)

  • Carkovic M and Levine R (2002) Does foreign direct investment accelerate economic growth? Working Paper, University of Minnesota

  • Carkovic M and Levine R (2005) Does foreign direct investment accelerates economic growth? In: Moran T, Graham E and Blomström M (eds) Does Foreign Direct Investment Promote Development? Peterson Institute for International Economics

  • Caves R (1996) Multinational Enterprise and Economic Analysis. Cambridge, England: Cambridge University Press

  • Choe JI (2003) Do foreign direct investment and gross domestic investment promote economic growth? Rev Dev Econ 7:44–57

    Article  Google Scholar 

  • Chowdhury A and Mavrotas G (2005) FDI and growth: a causal relationship, UNUWIDER Research Paper No. 2005/25, UNU-WIDER

  • De Backer K and Sleuwagen L (2003) Does foreign direct investment crowd out domestic entrepreneurship quest? Rev Ind Organ 22(1):67–102

    Google Scholar 

  • De Mello Jr Luiz R (1997) Foreign direct investment-led growth: evidence from time series and panel data. Oxf Econ Pap 51:133–154

    Article  Google Scholar 

  • De Mello Jr Luiz R (1999) Foreign direct investment in developing countries and growth: a selective survey. J Dev Stud 34(1):1–34

    Google Scholar 

  • Dickey D, Fuller W (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74:427–431

    Google Scholar 

  • Dickey D, Fuller W (1981) Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica 49:1057–72

    Article  Google Scholar 

  • Dolado J, Lutkepohl H (1996) Making wald tests work for co-integrated VAR systems. Econ Rev 15:369–386

    Article  Google Scholar 

  • Economic Commission for Latin America and the Caribbean (ECLAC): CEPAL Report 2012

  • Fortanier F (2007) Foreign direct investment and host country economic growth: does the investor’s country of origin play a role? Transl Corp 16(No. 2)

  • Granger CWJ (1969) Investigating causal relations by econometric models and cross spectral methods. Econometrica 37:424–438

    Article  Google Scholar 

  • Greene W (2008) Econometric analysis, 6th edn. Pearson Educational Limited

  • Hanson G (2001) Should countries promote foreign direct investment? UNCTAD: G-24 Discussion Paper Series No. 9, UNCTAD, Geneva

  • Hansen H, Rand J (2006) On the causal links between fdi and growth in developing countries. World Econ 29(No. 1)

  • Hein S (1992) Trade strategy and the dependency hypothesis: a comparison of policy, foreign investment, and economic growth in Latin America. Econ Dev Cult Chang 40(3):495–521

    Article  Google Scholar 

  • Hermes N, Lensink R (2003) Foreign direct investment, financial development and economic growth. J Dev Stud 40(1):142–163

    Article  Google Scholar 

  • Holtz-Eakin D, Newey W, Rosen HS (1988) Estimating Vector Autoregressions with panel data. Econometrica 56(6):1371–1395

    Article  Google Scholar 

  • International Monetary Fund (2009) International Financial Statistics CD-ROM, Washington DC

  • Johansen S (1988) Statistical analysis of Co-integrating Vectors. J Econ Dyn Control 12:231–254

    Article  Google Scholar 

  • Johansen S, Juselius K (1990) Maximum likelihood estimation and inference on cointegration with applications to demand for money. Oxford Bull Econ Stat 52:169–210

    Article  Google Scholar 

  • Kholdy S, Sohrabian A (2005) Financial Markets, FDI and Economic Growth: Granger Causality Tests in Panel Data Model. Working Paper, California State Polytechnic University

  • Kwiatkowski et al. (1992) Testing the null hypothesis of stationarity against the alternative of a unit root. J Econ 54:159–178

  • Lipsey RE (2002) Home and host country effects of foreign direct investment. Paper presented at ISIT Conference on Challenges to Globalization, Lidingo, Sweden

  • OECD (2002) Foreign direct investment for development: maximizing benefits, minimizing costs. OECD Policy Brief. OECD, Paris

  • Phillips PCB, Perron P (1988) Testing for a unit root in time series regression. Biometrika 75(2):336–346

    Article  Google Scholar 

  • Schmidt P, Phillips P (1992) LM Tests for a Unit Root in the Presence of Deterministic Trends. Oxford Bulletin of Economics and Statistics, 54(3) pp 257–287

  • Shan J, Tian GG and Sun F (1997) The FDI-led growth hypothesis: Further Econometric evidence from China. Economic Division Working Papers 97/2, NSDS, Australia

  • Sims CA (1972) Money, income and causality. Am Econ Rev 62:540–552

    Google Scholar 

  • Singh H, Jun KW (1995) Some new evidence on determinants of foreign direct investment in developing countries. World Bank, Policy Research Working Paper 1531, Washington, D.C

  • Toda HY, Yamamoto (1995) Statistical inference in Vector Autoregressions with possibly integrated processes. J Econ 66:225–250

    Google Scholar 

  • UNCTAD. World Investment Report 2011 and 2012. UNCTAD, Geneva

  • World Bank (2009) World development indicators, Washington DC

  • World Bank (2012) Latin American and the Caribbean region; Global Economic Prospects. Latin American and the Caribbean Annex, January

  • Zhang KH (2001) Does foreign direct investment promote economic growth? Evidence from East Asia and Latin America. Contemp Econ Policy 19:175–185

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Business and Information Systems, York College of The City University of New York, 94-20 Guy R Brewer Blvd, Jamaica, NY, 11451, USA

    Olajide S. Oladipo

Authors
  1. Olajide S. Oladipo
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Olajide S. Oladipo.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Oladipo, O.S. Does foreign direct investment cause long run economic growth? Evidence from the Latin American and the Caribbean countries. Int Econ Econ Policy 10, 569–582 (2013). https://doi.org/10.1007/s10368-012-0225-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10368-012-0225-4

Keywords

Search

Navigation