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Foreign direct investment, technological innovation and economic growth: empirical evidence using simultaneous equations model

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Abstract

The effect of foreign direct investment on economic growth has been widely discussed in theoretical and empirical works. While the positive effects of FDI have been widely known in the theoretical literature, empirical works developed over the past two decades on the subject led to mixed conclusions. The main objective of this paper was to clarify this relationship by examining the above interaction focusing on the role of technological innovation in this relationship. To do this, a simultaneous equations model describing the interrelationship between foreign direct investment, technological innovation and economic growth for 83 developed and developing countries is estimated over the period 1990–2012. Our empirical results show that there is a positive and significant effect of foreign direct investment on economic growth only for middle- and high-income countries, whereas for low-income countries foreign direct investment does not have a positive impact on these economies. Our findings show also that technological innovation plays an important role in determining the foreign direct investment–economic growth relationship.

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Notes

  1. For more details on the identification of simultaneous equations model, see Appendix 2.

  2. The list of samples is presented in Appendix Table 8.

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Author information

Authors and Affiliations

  1. Department of Economics, Faculty of Economics and Management, Sousse, University of Sousse, Sousse, Tunisia

    Abdelhafidh Dhrifi

  2. Unité de recherche: Monnaie, Modélisation, Financement et développement (MO2FID), Sousse, Tunisia

    Abdelhafidh Dhrifi

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  1. Abdelhafidh Dhrifi
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Correspondence to Abdelhafidh Dhrifi.

Appendices

Appendix 1: Correlations between the various variables used in the regression models

 

INF

TRADE

FD

INV

TI

FDI

Equation (E1)

 INF

1

     

 TRADE

−0.213**

1

    

 FD

−0.303**

0.198**

1

   

 INV

0.154**

0.121**

0.218**

1

  

 TI

−0.364**

0.205**

0.356**

−0.364**

1

 

 FDI

−0.134

0.421*

0.263**

0.048*

0.141**

1

 

SCH

INST

RD

GDPG

FDI

Equation (E2)

 SCH

1

    

 INST

−0.104

1

   

 RD

0.088**

0.147**

1

  

 GDPG

0.191**

0.106**

0.055*

1

 

 FDI

0.047*

0.034*

0.421*

0.212**

1

 

TARIF

TAX

TEL

TI

GDPG

Equation (E3)

 TARIF

1

    

 TAX

0.095*

1

   

 TEL

0.182**

0.438**

1

  

 TI

0.067

−0.214**

0.274**

1

 

 GDPG

0.147***

0.129*

0.324**

0.407**

1

Appendix 2: Identification of the model

We have three endogenous variables in the model (i.e., W = 3) “GDPG,” “TI” and “FDI” and many exogenous variables: “TRADE,” “SCH,” “FD,” “INF,” “TARIF,” “TAX,” “RD,” “INV,” “INST” and “TEL” (i.e., K = 10).

By applying the identification conditions in the first equation, the variables in the equation of growth give: W = 1, K = 10 and K′ = 6 and r = 0 with W′ is the number of endogenous variables in an equation, K is the number of exogenous variables in an equation, and r the number of restriction.

Is therefore: W−W′ + K−K′ = 3–1 + 10−6 = 6 > W−1 = 3−1 = 2, the first equation is identified.

The second equation has seven exclusion restrictions but no restriction stress. Consequently W = 3, K = 10, W = 1, K′ = 5 and r = 0, which gives us: W−W′ + K−K′ = 3−1 + 10−5 = 7 > W−1 = 2, the equation is over-identified.

The third equation has six exclusion restrictions but no restriction stress. Therefore W = 3, K = 10, W = 1, K′ = 5 and r = 0, this means that W−W′ + K−K′ = 3−1 + 10−5 = 7 > W−1 = 2, the third equation is over-identified.

Since in our model all the equations are over-identified, the model is over-identified.

Appendix 3

See Tables 6, 7, and 8.

Table 6 Test of stationarity
Full size table
Table 7 Descriptive statistics
Full size table
Table 8 List of the sample countries
Full size table

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Dhrifi, A. Foreign direct investment, technological innovation and economic growth: empirical evidence using simultaneous equations model. Int Rev Econ 62, 381–400 (2015). https://doi.org/10.1007/s12232-015-0230-3

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