Foreign aid, FDI and economic growth in selective SAARC countries: A Panel Co integration Approach

Abdullah Iftikhar


The literature on foreign direct investment (FDI) and economic growth generally points to a positive FDI-growth relationship.  However, very few studies offer direct tests of causality between the two variables.  In theory, economic growth may induce FDI inflow, and FDI may also stimulate economic growth.  This paper adds to the literature by analyzing the existence and nature of these causal relationships.  The present analysis focuses on selective SAARC countries , where growth of FDI has been the most pronounced.  Using Granger causality tests, the paper finds substantial variation in the FDI-growth relationship across countries.  Further analyses, based on regression techniques, reveal that FDI-to-growth causality is strengthened by the presence of greater trade openness, more limited rule of law, lower receipts of aid, and lower income level of the host country.  Growth-to-FDI causality, on the other hand, is reinforced by greater political rights and more limited rule of law.


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