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The Association between FDI and GDP

Info: 1529 words (6 pages) Essay
Published: 8th Feb 2020 in Economics

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Abstract

Foreign direct investment is a causing faster growth in many different countries. The way FDI presents itself and its impact on economic growth in the countries has been different in each and every country. There have been many studies with different results on how FDI affects economic growth, but some of the results have varied. The graphs studied showed the association between FDI and GDP in Bangladesh, Benin, Bolivia, Botswana, Burkina Faso, Burundi, Cambodia, Chad, Chile, Colombia, Congo – Rep., Congo-Dem. Rep., Cote d’Ivoire, Djibouti, Dominican Republic, Equatorial Guinea, Eritrea, Ethiopia, Gabon, The Gambia, Ghana, Guatemala, Guinea, Guyana, Haiti, Honduras, India, Jamaica, Jordan, Kenya, Kuwait, Lebanon, Lesotho, Malawi, Malaysia, Mali, Mauritius, Mexico, Namibia, Nepal, Nicaragua, Niger, Nigeria, Pakistan, Peru, Philippines, Rwanda, Senegal, Sierra Leone, Sri Lanka, South Africa, Tanzania, Thailand, Trinidad and Tobago, Togo, Turkey, Uganda, Uruguay, Venezuela, Vietnam, Zambia, and Zimbabwe; to be positive.

Introduction

 

The relationship between FDI and GDP has promoted multiple journals and research articles focusing mainly on developing and industrial countries. Foreign direct investment is an investment that is made by someone in a country into business interests of another country. The gross domestic product is a tool to measure the health of a country’s economy. It measures the total of final goods and services produced in a period of time. The amount of goods and services made corresponds to the amount of investments that sector, thus a relationship between GDP and FDI begins. In developed and developing countries there has been a gain in attention on how the FDI is a growth accelerating component. In multiple research studies, it shows that there is a positive relationship between the FDI and GDP of host countries. Studies suggest that the FDI accelerates economic growth in the countries studied. The impact of FDI is higher in the countries that have outward trade policies, rather than inward trade policies.

Foreign Direct Investment

The role of FDI plays in countries is that it is an important source of capital, new job opportunities, technology enhancement, boost overall economic growth, and complements private investments. A study done by Blomstrom, Lipsey and Zejan, found that FDI is growth enhancing if the country is adequately considered in terms of immense per capita income (Blomstrom, Lipsey and Zejan 243-259). The FDI is able to assist in economic growth in developing countries for many reasons. One reason is to improve trade balances, countries use the FDI to increase their surplus of capital account. Secondly, the FDI makes it easier for developing countries to gain access to new technology, which would make management and labor more skilled and effective. The last reason is with lower rates of capital in developing countries, which causes FDI to provide support for domestic investment and increase economic growth.

Gross Domestic Product

The gross domestic product is a primary health indicator on how the economy is doing. It is the total dollar amount of all goods and services produced in a time period. The three different ways to calculate GDP are expenditures, income, and production. GDP is important because it gives an overall picture of the state of the economy. With this overall picture, it allows central banks and policy makers to be able to see if the economy is expanding or contracting. It also shows if there could be a possible threat like a recession coming.  It is one of the most accurate ways to indicate the size of an economy. GDP has a huge impact on everyone in an economy, as an example that Leslie Kramer gave is a good GDP would cause low unemployment rates and wage increases (Kramer).

FDI and Economic Growth Relationship

According to certain studies, the idea that outward or inward FDI position of a country is related to the economic growth measured by the GDP, relative to the rest of the world. This means countries develop through the five stages; traditional society, pre-conditions for take-off, take-off, drive to maturity, and age of mass consumption. The effect of FDI on GDP was forced by the decline of returns of physical capital. In a study conducted by De Mello in the year 1999, it suggested that he was trying to find out if his FDI growth hypothesis was true. He conducted a panel of data from 32 countries in the period 1970-1990. He found that FDI had a strong correlation to improving the economic growth, depending on factors like labor and how it impacts the country (De Mello 1999). An additional study done by Bgahawatte and Balamurali in the year 2004 showed that there is a casual link between economic growth and FDI because the results were that economic growth rates are strongly affected by FDI. Chowhurdy and Mavrotas tested the relationship between FDI and growth in three devolving countries; Chile, Malaysia and Thailand. In their study, they found that in two of the countries there was strong proof of a relationship between GDP and FDI (Chowhurdy and Mavrotas 2006).

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These studies suggest that FDI is a staple of growth in general economics. The world bank found that in multiple studies it showed that FDI does cause the Economic development in a country just by causing productivity in growth and export. Though these relationships found vary between countries. A lot of different characteristics come into play when studying the relationship of growth and FDI, which are a main determinant of the benefits that FDI causes.

Conclusion

In conclusion, in many studies I read about they declared that the relationship between FDI and GDP varied between countries. In developing countries there was typically a stronger correlation between the relationship. I found that in the studies that showed correlation, that it strongly depended on certain characteristics within the countries.  I found that FDI plays a vital role in economic growth in all countries. Over the years research has shown a positive impact of FDI on GDP. After conducting research, I confirmed my findings of the positive association between FDI and GDP in Bangladesh, Benin, Bolivia, Botswana, Burkina Faso, Burundi, Cambodia, Chad, Chile, Colombia, Congo – Rep., Congo-Dem. Rep., Cote d’Ivoire, Djibouti, Dominican Republic, Equatorial Guinea, Eritrea, Ethiopia, Gabon, The Gambia, Ghana, Guatemala, Guinea, Guyana, Haiti, Honduras, India, Jamaica, Jordan, Kenya, Kuwait, Lebanon, Lesotho, Malawi, Malaysia, Mali, Mauritius, Mexico, Namibia, Nepal, Nicaragua, Niger, Nigeria, Pakistan, Peru, Philippines, Rwanda, Senegal, Sierra Leone, Sri Lanka, South Africa, Tanzania, Thailand, Trinidad and Tobago, Togo, Turkey, Uganda, Uruguay, Venezuela, Vietnam, Zambia, and Zimbabwe. The positive association is showed in the scatter plots below.

References

  • Baumol, W. J., Nelson, R. R., & Wolff, E. N. (1994). Convergence of productivity: Cross-national studies and historical evidence. New York: Oxford University Press.
  • Chowdhury, A., & Mavrotas, G. (2006). FDI and Growth: What Causes What? The World Economy,29(1), 9-19. doi:10.1111/j.1467-9701.2006.00755.x
  • Hippolyte, A. R. (2019). Foreign investment law and developing countries. Research Handbook on Foreign Direct Investment,72-125. doi:10.4337/9781785369858.00010
  • Iqbal, N., Ahmad, N., Haider, Z., & Anwar, S. (2013). Impact of Foreign Direct Investment (FDI) on GDP: A Case Study from Pakistan. International Letters of Social and Humanistic Sciences,16, 73-80. doi:10.18052/www.scipress.com/ilshs.16.73
  • Kramer, L. (2019, March 12). What is GDP and Why is It So Important to Economists and Investors? Retrieved from https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/
  • Mello, L. D. (1999). Foreign direct investment-led growth: Evidence from time series and panel data. Oxford Economic Papers,51(1), 133-151. doi:10.1093/oep/51.1.133
  • Picardo, E. (2019, March 12). The GDP and its Importance. Retrieved from https://www.investopedia.com/articles/investing/121213/gdp-and-its-importance.asp
  • Sengupta, P., & Puri, R. (2018). Exploration of Relationship between FDI and GDP: A Comparison between India and Its Neighbouring Countries. Global Business Review,097215091876002. doi:10.1177/0972150918760026

 

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