Foreign direct investment and economic growth

Abstract

This paper provides evidence of a causal relationship between foreign direct investment (FDI) inflows and economic development as measured by real, per capita GDP growth in recipient countries. I conduct a cross-country empirical analysis using a fixed effects and instrumental variables approach to determine the effect of exogenous changes in FDI inflows on recipient country growth. I use a dataset constructed by Silvia Miranda-Agrippino that contains non-systematic (random) movements in US monetary policy to generate a novel instrument for FDI flows. These results broadly validate the findings of previous literature and open the door for further research into the precise mechanisms that generate this relationship.