Foreign direct investment and economic growth in less developed countries: an empirical study of causality and mechanisms

We examine the causality between foreign direct investment (FDI) and economic growth for 66 developing countries, taking into account their interaction with exports and technological change. Time series analysis for each country is conducted, based on a method introduced by Toda and Yamamoto (1995 Toda, HY and Yamamoto, T. 1995. Statistical inference in vector autoregression with possibly integrated processes. Journal of Econometrics, 66: 225–50. [Crossref], [Web of Science ®] , [Google Scholar]) for testing Granger causality in the presence of nonstationary time series. The main findings of this article are: FDI causes growth in several of the developing countries, but the mechanism through which this works differs across countries and reverse causality from growth to FDI exists for many countries.