Abstract:
Positive spillover effects of Foreign Direct Investment (FDI) are hypothesized to
significantly influence growth promoting factors identified by the endogenous growth
theory. However, empirical studies that concentrate on these dynamic comparative
advantages of FDI are limited. Therefore, this study empirically investigates the effect
of five (05) theoretically chosen dynamic channels on economic growth with
reference to South Asian countries. In this regard, channel effects of Physical
Investment, Human Capital, Technology Transfer, Macroeconomic Policy Credibility,
and Price Distortion are considered over the period 2003 to 2014. A Structural
Equation Model (SEM) is developed to represent the dynamic relationship among
these channel variables and economic growth. Three-Stage Least Squares (3SLS)
estimation technique is used to estimate the SEM. The results for 3SLS indicate that
effect of FDI on each of the channel variable is statistically significant with the
expected sign. Further, the results are consistent when the estimation technique is
robusted with Seemingly Unrelated Regression (SURE). However, economic growth
effects of FDI are found statistically significant only through Human Capital,
Technology Transfer, and Macroeconomic Policy Credibility channels.
