significant determinants of FDI and economic growth. On the other hand, although both FDI and
economic growth affect each other in a positive way, the effect of economic growth on FDI is larger
than the effect of FDI on economic growth in OECD countries.
Our findings are mostly consistent with the literature, though there are some counter
findings. Our finding that FDI inflows affect economic growth positively is supported by a bulky
number of studies such as Hyun (2006), Li and Liu (2005) and Saha (2005), among others.5
Contradicting evidence is found by Bornschier, Chase-Dunn and Rubinson (1978) and Durham
(2004). The former study argues that FDI has especially negative impact on the growth rate of
developing countries. The latter study asserts that current value of FDI does not have any positive
impact on the growth rate. Johnson (2006) on the other hand argues that FDI has positive impact on
developing countries but not on developed countries. As our study focuses on OECD countries,
which are developed by and large, our results contradicts with this result.
Moreover, our finding about the positive impact of economic growth rates on FDI inflow,
consistent with the findings of Chowdhury and Mavrotas (2006), Saha (2005) and Choe (2003).
Also, our finding that human capital has a positive impact on FDI and economic growth is
consistent with the foundations of Li and Liu (2005) and Balasubramanyam, Salisu and Sapsford
(1999). Lastly, positive impacts of exports on both economic growth rates and FDI inflows are also
found in the article of Saha (2005).
5. Concluding Remarks
The bi-directional relationship between FDI and economic growth has not been sufficiently studied
in the literature. In this study, we run several models to test whether there exists bi-directional
relationship between FDI and economic growth or not. This is an important research question
because if bi-directional relationship exists between these variables, one-direction (one-equation)
studies investigating the impact of FDI on economic growth or vice versa statistically yield
misleading results. In other words, if there is an endogeneity between FDI and growth, then all
econometric estimations ignoring this endogeneity will produce wrong and misleading results.
In this paper, the endogenous relationship between foreign direct investment and economic
growth was examined for 23 OECD countries for the 1975 - 2004 period. A simultaneous equation
system was established and an econometric estimation procedure was applied. Our empirical results
suggest that FDI growth positively affects economic growth rate and also that economic growth rate
positively affects the growth rate of FDI inflows. Our results also indicate that economic growth
stimulates growth rate of FDI inflows more strongly than that the growth rate of FDI stimulates
economic growth.
5 See Annex A for the list of all studies, with supportive or contradictory results.
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