Foreign Direct Investment and Endogenous Growth: Evidence from South Asian Countries

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.