Exploring Foreign Direct Investment (FDI) Flow and Economic Growth: A Systematic Approach
Abstract
This research aims to deepen the understanding of Foreign Direct Investment (FDI) and its relationship with economic growth by systematically reviewing existing literature. The study also seeks to elucidate the factors influencing FDI and how FDI flows impact economic growth, alongside examining the opportunities and challenges posed by FDI adoption. This study conducted a review of 100 publications published between 2001 and 2022 using data sourced from the Scopus database, as well as other comprehensive databases such as ScienceDirect, Emerald Insight, JStor, PLOS ONE, Springer, and Taylor & Francis. The review incorporated empirical research, case studies, and reports from institutions like the World Bank and OECD. Additionally, related books and theoretical frameworks were referenced to support the analysis. The literature indicates that FDI can influence economic growth in various ways. Broadly, FDI is recognized as a significant driver of development and an essential part of an open and efficient international economic system. However, the distribution of FDI benefits is not uniform or automatic across countries, sectors, or local communities. The findings highlight that social and macroeconomic factors play crucial roles in shaping business decisions regarding FDI, contingent on the unique characteristics of the host country. This research provides a conceptual framework based on existing literature for understanding the impact of FDI on economic growth. It encourages empirical studies to validate and test the applicability and effectiveness of this framework in real-world contexts. Originality/value by synthesizing diverse perspectives from the literature, this paper identifies key factors influencing FDI flows and their impact on economic growth. It offers practical insights that could assist investors in comprehending FDI dynamics and their implications for economic development.
References
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W. C. Poon, C. K. Choong, and M. S. Habibullah, “Exchange Rate Volatility and Exports for Selected East Asian Countries: Evidence from Error Correction Model,” ASEAN Econ Bull, vol. 22, no. 2, pp. 144–159, Aug. 2005, doi: 10.1355/ae22-2b.
Y. Miaojie, “Firm R&D, absorptive capacity, and learning by exporting,” in Trade Openness and China’s Economic Development, Routledge, 2019, pp. 299–315. doi: 10.4324/9781003008125-12.
S. Sayek, “Foreign Direct Investment and Inflation,” South Econ J, vol. 76, no. 2, pp. 419–443, Oct. 2009, doi: 10.4284/sej.2009.76.2.419.
I. Roy and K. Narayanan, “Pull Factors of FDI: A Cross-Country Analysis of Advanced and Developing Countries,” in Globalisation of Technology, Springer Singapore, 2017, pp. 13–46. doi: 10.1007/978-981-10-5424-2_2.
B. Rakshit, “Dynamics between trade openness, FDI and economic growth: evidence from an emerging economy,” Journal of International Trade Law and Policy, vol. 21, no. 1, pp. 16–41, Oct. 2021, doi: 10.1108/jitlp-01-2021-0004.
J. Paul and M. M. Feliciano-Cestero, “Five decades of research on foreign direct investment by MNEs: An overview and research agenda,” J Bus Res, vol. 124, pp. 800–812, Jan. 2021, doi: 10.1016/j.jbusres.2020.04.017.
K. I. Okere, O. B. Muoneke, F. C. Onuoha, and P. C. Omoke, “Tripartite relationship between FDI, trade openness and economic growth amidst global economic crisis in Nigeria: application of combined cointegration and augmented ARDL analysis,” Future Business Journal, vol. 8, no. 1, Apr. 2022, doi: 10.1186/s43093-022-00116-w.
“Foreign Direct Investment for Development (Summary in Spanish),” Sep. 2002, OECD. doi: 10.1787/9789264199286-sum-es.
F. Noorbakhsh, A. Paloni, and A. Youssef, “Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence,” World Dev, vol. 29, no. 9, pp. 1593–1610, Sep. 2001, doi: 10.1016/s0305-750x(01)00054-7.
S. Nupehewa, S. Liyanage, D. Polkotuwa, M. Thiyagarajah, R. Jayathilaka, and A. Lokeshwara, “More than just investment: Causality analysis between foreign direct investment and economic growth,” PLoS One, vol. 17, no. 11, p. e0276621, Nov. 2022, doi: 10.1371/journal.pone.0276621.
E. Nketiah-Amponsah and B. Sarpong, “Effect of Infrastructure and Foreign Direct Investment on Economic Growth in Sub-Saharan Africa,” Global Journal of Emerging Market Economies, vol. 11, no. 3, pp. 183–201, Sep. 2019, doi: 10.1177/0974910119887242.
J. Jeetoo, “Spillover effects in public healthcare expenditure in Sub‐Saharan Africa: A spatial panel analysis,” African Development Review, vol. 32, no. 2, pp. 257–268, Jun. 2020, doi: 10.1111/1467-8268.12432.
H. Ding, C. Qin, and K. Shi, “Who benefit from government-led microfinance projects? Evidence from rural China,” J Comp Econ, vol. 46, no. 4, pp. 1253–1272, Dec. 2018, doi: 10.1016/j.jce.2018.08.001.
T. Mahbub and J. Jongwanich, “Barriers to foreign direct investment in the power sector: evidence from Bangladesh,” International Journal of Development Issues, vol. 18, no. 3, pp. 310–333, Sep. 2019, doi: 10.1108/ijdi-11-2018-0182.
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A. Lagendijk and B. Hendrikx, “Foreign Direct Investment,” in International Encyclopedia of Human Geography, Elsevier, 2009, pp. 243–254. doi: 10.1016/b978-008044910-4.00167-x.
A. B. Choudhary and M. Reksulak, “Reducing the Impact of Ethnic Tensions on Economic Growth: Economic or Political Institutions?,” in Economic and Political Institutions and Development, Springer International Publishing, 2019, pp. 167–182. doi: 10.1007/978-3-030-06049-7_10.
R. Kishi, G. Maggio, and C. Raleigh, “Foreign Investment and State Conflicts in Africa,” Peace Economics, Peace Science and Public Policy, vol. 23, no. 3, Jul. 2017, doi: 10.1515/peps-2017-0007.
J. O. Alabede, “Tax policy attractiveness, institutional quality, and FDI inflows in developing countries,” International Journal of Business and Emerging Markets, vol. 1, no. 1, 2027, doi: 10.1504/ijbem.2027.10064688.
A. Kamaly, “Does FDI Crowd in or out Domestic Investment? New Evidence from Emerging Economies,” Modern Economy, vol. 05, no. 04, pp. 391–400, 2014, doi: 10.4236/me.2014.54038.
O. Adediran, “Foreign Direct Investment and Economic Growth: Evidence from Sub-Saharan African Countries,” in Foreign Direct Investment and Economic Growth: Evidence from Sub-Saharan African Countries, ScienceOpen, 2023. doi: 10.14293/sblunisa.2023a014.oa.
W. Henok and T. Kaulihowa, “The impact of FDI on human capital development in SACU countries,” Int J Soc Econ, vol. 49, no. 2, pp. 268–279, Nov. 2021, doi: 10.1108/ijse-02-2021-0123.
F. Wang, L. Ning, and J. Zhang, “FDI pace, rhythm and host region technological upgrading: Intra- and interregional evidence from Chinese cities,” China Economic Review, vol. 46, pp. S65–S76, Dec. 2017, doi: 10.1016/j.chieco.2017.02.007.
W. Henok and T. Kaulihowa, “Author response for ‘The impact of FDI on human capital development in SACU countries,’” Oct. 2021, Emerald. doi: 10.1108/ijse-02-2021-0123/v3/response1.
B. R. Gutola and M. Milos, “The Impact of Foreign Direct Investment on the Economic Growth of Developing Countries. Giving Example of Kenya,” in Developments in Information & Knowledge Management for Business Applications, Springer International Publishing, 2022, pp. 379–401. doi: 10.1007/978-3-030-97008-6_17.
C. Goldin and L. Katz, The Incubator of Human Capital: The NBER and the Rise of the Human Capital Paradigm. 2020. doi: 10.3386/w26909.
S. K. Goh and K. N. Wong, “Malaysia’s outward FDI: The effects of market size and government policy,” J Policy Model, vol. 33, no. 3, pp. 497–510, May 2011, doi: 10.1016/j.jpolmod.2010.12.008.
J. Donaubauer, “Does foreign aid really attract foreign investors? New evidence from panel cointegration,” Appl Econ Lett, vol. 21, no. 15, pp. 1094–1098, Apr. 2014, doi: 10.1080/13504851.2014.909570.
R. Forte and C. Paiva, “Barriers to FDI in the European Union Countries: The Perception of Foreign Subsidiaries,” Journal of East-West Business, vol. 27, no. 1, pp. 30–56, Sep. 2020, doi: 10.1080/10669868.2020.1822487.
T. T.-H. Dinh, D. H. Vo, A. The Vo, and T. C. Nguyen, “Foreign Direct Investment and Economic Growth in the Short Run and Long Run: Empirical Evidence from Developing Countries,” Journal of Risk and Financial Management, vol. 12, no. 4, p. 176, Nov. 2019, doi: 10.3390/jrfm12040176.
S. Lahiri and F. Mesa, “Local content requirement on foreign direct investment under exchange rate volatility,” International Review of Economics & Finance, vol. 15, no. 3, pp. 346–363, Jan. 2006, doi: 10.1016/j.iref.2004.05.001.
R. Chakrabarti and B. Scholnick, “Exchange rate expectations and foreign direct investment flows,” Weltwirtsch Arch, vol. 138, no. 1, pp. 1–21, Mar. 2002, doi: 10.1007/bf02707321.
M. Bussmann, “Foreign direct investment and militarized international conflict,” J Peace Res, vol. 47, no. 2, pp. 143–153, Feb. 2010, doi: 10.1177/0022343309354143.
Z. Aurangzeb and T. Stengos, “The role of Foreign Direct Investment (FDI) in a dualistic growth framework: A smooth coefficient semi-parametric approach,” Borsa Istanbul Review, vol. 14, no. 3, pp. 133–144, Sep. 2014, doi: 10.1016/j.bir.2014.06.004.
A. Abbas, I. Moosa, and V. Ramiah, “The contribution of human capital to foreign direct investment inflows in developing countries,” Journal of Intellectual Capital, vol. 23, no. 1, pp. 9–26, May 2021, doi: 10.1108/jic-12-2020-0388.
N. A. Bakar, S. H. C. Mat, and M. Harun, “The Impact of Infrastructure on Foreign Direct Investment: The Case of Malaysia,” Procedia Soc Behav Sci, vol. 65, pp. 205–211, Dec. 2012, doi: 10.1016/j.sbspro.2012.11.112.
T. S. Adebayo, K. Onyibor, and G. D. Akinsola, “The impact of major macroeconomic variables on foreign direct investment in Nigeria: evidence from a wavelet coherence technique,” SN Business & Economics, vol. 1, no. 1, Nov. 2020, doi: 10.1007/s43546-020-00018-5.
A. Okara, “Does foreign direct investment promote political stability? Evidence from developing economies,” Econ Model, vol. 123, p. 106249, Jun. 2023, doi: 10.1016/j.econmod.2023.106249.
J. Cummins and R. G. Hubbard, The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data. 1994. doi: 10.3386/w4703.
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