The Effects of Outward Foreign Direct Investment and Institutional Quality on Economic Growth

Abstract

This study examines the interactions of outward foreign direct investment with institutional quality as well as other macroeconomic determinants to determine whether their joint impact promotes home country economic growth. Econometric techniques such as the pooled OLS, fixed effect, differenced Generalized Methods of Moment, and the System Generalized Methods of Moment (GMM) are utilized for panel dataset of 141 countries for the period 2003-2019. The study finds that the dynamic interaction of outward foreign direct investments (FDI) and institutional quality is positive and boosts home country’s economic growth and development. Furthermore, evidence shows that the mutual reinforcement of outward FDI and exchange rate gives rise to economic growth. This suggests that when home country’s currency appreciates, there may be a higher flow of overseas direct investment to countries with weaker exchange rate, given that the domestic currency can buy more investment. This enhances economic growth through forward and backward linkages. These results imply that policymakers should consider sound economic policies that integrates outward FDI with home country institutions as well as other economic determinants to enhance economic growth.