Foreign Direct Investment (FDI) and Economic Growth in Southern and Southeastern Asian Developing Economies

Abstract

Foreign direct investment attracts capital, knowledge and increase the balance of payment in the host country thus helps in economic development of the host country, this study aims to find out the contribution of the FDI to the economic growth of south and Southeast Asian economies. The analysis is done through a growth model using a panel data study and employs a generalized method of moments (GMM) methodology to assess the effect of FDI on growth and to account for possible bi-directional causality (endogeneity) between the macroeconomic variables employed in the empirical model used in this study. The data on independents and dependent variables related to 7 south Asian and 8 Southeast Asian economies for the period from 2005 to 2015 are from International Monetary Fund, World Bank and The Heritage Foundation. The hypothesis of the research is that FDI leads to economic growth in the selected developing countries, the result of the empirical estimation came out to be consistent with the initial expectation. The research reveals positive relationship between FDI, foreign aid, economic freedom and economic growth. A negative relationship between government consumption and economic growth in the selected south and Southeast Asian countries in period from 2005 to 2015 is found in the study. Therefore, the paper concludes that FDI can facilitate economic growth and stimulate the economy of south and southeast Asian developing economies.