Causal Relationship between Foreign Direct Investment and Economic Growth

Bakır, Hasan; Eryilmaz, Filiz

doi:10.4018/978-1-4666-7288-8.ch020

Cited by 5 publications

(5 citation statements)

References 12 publications

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“…This finding is in accordance with some notable empirical studies that support the growth-led hypothesis, i.e. Choe (2003), Basu et al (2007), Zhao andDu (2007), Attari et al (2011), Moudatsou and Kyrkilis (2011), Bakır and Eryılmaz (2015), Kahveci and Terzi (2017) and € Onc€ u and Celik (2018). To sum up, asymmetric causality test results support the FDI-led growth argument in 12 countries, while Growth-led FDI is valid in only 4 countries.…”

Section: Fdi and Growthsupporting

confidence: 90%

“…(2007), Zhao and Du (2007), Attari et al. (2011), Moudatsou and Kyrkilis (2011), Bakır and Eryılmaz (2015), Kahveci and Terzi (2017) and Öncü and Celik (2018).…”

Section: Data Methodology and Emprical Resultsmentioning

confidence: 99%

“…Thus, the empirical findings of the paper are in line with the arguments in favor of Growth-induced FDI. Bakır and Eryılmaz (2015) investigate the causal relationship between foreign direct investment inflows and economic growth, as measured by the Real Gross Domestic Product (GDP) per capita in Turkey during the 1974-2012 period. The results of Granger causality tests show that economic growth causes Granger-induced FDI inflows.…”

Section: Literaturementioning

confidence: 99%

“…, 2007; Zhao and Du, 2007; Attari et al. , 2011; Bakır and Eryılmaz, 2015; Kahveci and Terzi, 2017; Öncü and Çelik, 2018).…”

Section: Introductionmentioning

confidence: 99%

“…The FDI-led economic growth hypothesis argues that a causal link runs from FDI to economic growth (Nurudeen et al, 2010;Feridun and Sissoko, 2011;Mehic et al, 2013;Sokang, 2018;Nguyen, 2020). On the other hand, the growth-led FDI hypothesis asserts that the causal link operates from economic growth to FDI (Choe, 2003;Basu et al, 2007;Zhao and Du, 2007;Attari et al, 2011;Bakır and Eryılmaz, 2015;Kahveci and Terzi, 2017;€ Onc€ u and Çelik, 2018). The theoretical foundation for the FDI-led growth hypothesis derives from either the Neoclassical models of growth or the Endogenous Growth Models.…”

Section: Introductionmentioning

confidence: 99%

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The causality relationship between foreign direct investment and economic growth in RCEP countries

Karahan

Çolak²

2022

JEAS

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PurposeThe direction of the causality relationship between Foreign Direct Investment (FDI) and economic growth is a highly controversial issue in the literature. There are two basic approaches advocating different causal directions between FDI and growth, which are called hypotheses of FDI-led Growth and Growth-led FDI. The aim of this study is to analyze the causality relationship between FDI and economic growth in RCEP countries and thus make a new contribution to the discussions in the relevant literature. In addition, the results of the study are expected to provide important implications for the policies to be designed for economic growth based on FDI flows to RCEP countries. Thus, by examining the direction of causality between FDI and economic growth in RCEP countries, we aim to provide a new contribution to related literature and make some implications for the policy design process of economic growth in the RCEP area.Design/methodology/approachWe empirically examined the direction of a causal link between FDI and economic growth in the context of Regional Comprehensive Economic Partnership (RPEC) countries in order to test the hypothesis of FDI-led growth and Growth-led FDI. Accordingly, as our main variables of interest, we incorporated the inward foreign direct investment stock to gross domestic product ratio (FDI) and gross domestic product per capita (GDP). Hatemi-J (2012) asymmetric causality test has been employed in the investigation of the direction of causality between FDI and GDP over the period of 1980–2020. Thus, unlike most of the studies investigating the direction of causality between FDI and growth using the linear causality analysis method, our study performed a nonlinear causality analysis.FindingsEmpirical results reveal that the causal relationship between FDI and national income in RPEC countries is non-linear or asymmetric . The results of the symmetric causality test for both from FDI to national income and from national income to FDI are statistically insignificant for all countries. Therefore, this finding obtained from the study provided an important guide to the econometric methods to be used in other studies to be conducted in the same region in the future. Concerning the asymmetric causality relationship from FDI to growth, positive FDI shocks are an important cause of national income in most RCEP countries. However, the effect of negative FDI shocks on national income is quite weak compared to positive shocks. Regarding the asymmetric causality relationship from growth to FDI, positive national income shocks do not create a significant causal relationship with FDI. Similarly, the effects of negative national income shocks on FDI are statistically insignificant. Overall, asymmetric causality test results reveal that positive FDI shocks have an important causal impact on economic growth in most RCEP countries. Thus, the results of econometric analysis mostly support the argument that the FDI-led growth hypothesis rather than the Growth-led FDI hypothesis in RCEP countries. Accordingly, policy-makers in most of the RCEP countries should continue to provide more incentives and facilities to multinational companies in order to ensure constant economic growth.Originality/valueOur study brings a significant difference in the econometric method used compared to most of the other studies in the literature. Existing empirical studies on the direction of causality between FDI and growth mostly use standard Granger-linear causality-type tests to detect the direction of causality among FDI and growth. Unlike most of the studies in the literature, our study adopted a different methodological approach, namely the Hatemi J test to detect the non-linear causality between FDI and economic growth in RCEP countries. Therefore, this paper made a new methodological contribution significantly to the literature focusing on the causal relationship between FDI and economic growth by using a non-linear causality method rather than a linear causality one.

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Section: Fdi and Growthsupporting

confidence: 90%

“…(2007), Zhao and Du (2007), Attari et al. (2011), Moudatsou and Kyrkilis (2011), Bakır and Eryılmaz (2015), Kahveci and Terzi (2017) and Öncü and Celik (2018).…”

Section: Data Methodology and Emprical Resultsmentioning

confidence: 99%

Section: Literaturementioning

confidence: 99%

“…, 2007; Zhao and Du, 2007; Attari et al. , 2011; Bakır and Eryılmaz, 2015; Kahveci and Terzi, 2017; Öncü and Çelik, 2018).…”

Section: Introductionmentioning

confidence: 99%