Foreign Direct Investment and Economic Growth in the European Union

This paper contains an empirical assessment of the growth effects of foreign direct investment (FDI) in European Union (EU) countries, when controlling for other growth determinants. Using data over the period 1980-1996, we obtained estimates of the growth effects of FDI for each country in isolation and by pooling the data for the whole Union. Country-specific estimates suggest that growth determinants vary across EU members and that only past FDI inflows have a significant effect on growth. Interestingly, when data are pooled, the empirical results show that FDI has a positive effect on the growth rate of EU economies both directly and indirectly (through trade reinforcement). Also, unlike previous empirical findings concerning developing economies, we obtained evidence that the growth effect of FDI is not conditional upon the level of human capital in developed host countries.