More than just investment: Causality analysis between foreign direct investment and economic growth

Abstract

This study examines the causal nexus between Foreign Direct Investment (FDI) and the economic growth of seven (7) regions encompassing 117 countries. A more recent panel dataset over the period 2010–2020 was analysed using the Granger causality approach and panel VAR/block exogeneity test to conduct predictive analysis among the panel series. Wavelet coherence techniques too were adapted in bringing novelty and further justifications to the research in exploring the interaction effects of the variables, which are yet to be popularised in the studied discipline. The empirical results indicate the presence of bi-directional causality between FDI and economic growth globally and in the Asian region. In contrast, the causality is uni-directional in the American region. A non-directional causality was discovered in European, Oceanian, Mediterranean, and African regions, and the findings were consistent with the outcome of the wavelet coherence technique results. The study further classifies the regions into three cross-market categories such as developed, emerging and frontier markets. The results imply no causality for most developed and emerging economies in the regional analysis. Findings also provide insights for governments and policymakers worldwide to formulate policies on directing FDI flows and propositions for a host country to become a more conducive destination for FDI and accelerate economic growth.