Abstract This paper explores the role of foreign direct investment and local conditions on knowledge-driven economic growth in 28 Asia Pacific economies over 1996–2021. Using a Local Conditions Index constructed through PCA on human capital, institutional quality, financial development, policy reforms, and infrastructure, system-GMM reveals significant and positive impacts of FDI and Local Conditions on economic growth. The interaction between FDI and Local Conditions also reveals a significant impact, emphasizing the moderating effect of knowledge capacities of domestic economies on absorbing and utilizing foreign technology. The disaggregated analysis reveals that policy reforms, human capital, financial development, and institutional quality are significant determinants of the FDI-Growth nexus by enhancing innovation networks, absorptive capacities, and knowledge spillovers. However, infrastructure is found to be negatively related to economic growth. The most significant factor is financial development, which enables investment opportunities in productive and knowledge-intensive sectors and enables domestic economies to utilize foreign technology optimally. The study reveals that foreign direct investment is a significant contributor to economic growth through knowledge and technology transfer; however, its effectiveness is conditional on the learning and innovation capacities of host economies. This underlines the importance of knowledge capacities and supporting institutions in the host countries in leveraging foreign investment for sustained and innovation-driven growth, thereby firmly embedding the FDI-growth nexus in the knowledge economy framework.
Ullah et al. (Thu,) studied this question.