The purpose of our empirical investigation is to estimate the effects of FDI on economic growth, and to investigate the channel through which FDI may be beneficial for growth. In particular, as discussed in Section 2, we examine whether FDI interacts with the stock of human capital to affect growth rates. We also test whether the level of FDI has an effect on the overall level of investment in the country and on the efficiency of investment.
The main regression results indicate that FDI has a positive overall effect on economic growth, although the magnitude of this effect depends on the stock of human capital available in the host economy. However, the nature of the interaction of FDI with human capital is such that for countries with very low levels of human capital the direct effect of FDI is negative. The cross-country regressions also show that FDI exerts a positive, though not strong, effect on domestic investment, presumably because the attraction of complementary ac- tivities dominates the displacement of domestic competitors. This is an indirect effect of FDI on growth, since it operates through ‘pulling in’ other sources of investment. All regressions are based on panel data for the two decades 1970–79 and 1980–89, and were estimated using the seemingly unrelated regressions technique (SUR). We do not report cross-section regressions, which basically yield the same qualitative results as those of the panel estimation. The final sample consists of 69 developing countries, for which data on all the variables are available.
Table 1 reveals several interesting results for the effects of FDI on economic growth. Regression 1.1 shows that FDI has a positive impact on economic growth, after controlling for initial income, human capital, government consumption and the parallel market premium for foreign exchange. However, the coefficient of FDI in this specification is not statistically significant.