Missing causality links between foreign direct investment, exports, domestic investment and economic growth Online publication date: Wed, 13-Nov-2013
by Brinda Sooreea-Bheemul; Rajeev Sooreea
International Journal of Business and Emerging Markets (IJBEM), Vol. 5, No. 4, 2013
Abstract: This paper employs panel Granger causality techniques to identify long-run causal relations among FDI, exports, domestic investment and economic growth in 28 developing and emerging countries between 1980 and 1998. The results indicate uni-directional causality from economic growth to domestic investment but bi-directional causality between all other variable pairs. FDI appears to be superior to domestic investment in terms of its spillover and linkage effects, consistent with the new trade theory. It Granger-causes domestic investment, exports and economic growth. In turn, these lead to more FDI thus reinforcing the cycle. More exports also lead to higher economic growth. However, the missing causal link from domestic investment to economic growth together with bi-directional causalities between domestic investment, export-promoting FDI and growth-promoting FDI suggest that developing and emerging countries should not ignore their domestic investors at the expense of FDI and exports.
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