Growth and Foreign Direct Investment in the Pacific Island countries

•We examine the impact of Foreign Direct Investment (FDI) on economic growth in the Pacific.•The paper finds that FDI is associated with higher rates of economic growth in the Pacific.•Yet the impact of FDI is lower in the region than it is for countries on average.•This finding can be explained by FDI displacing domestic investment in the Pacific.

Achieving sustained high rates of economic growth in Pacific countries has proved incredibly challenging. Despite many being rich in natural resources, receiving high levels of foreign aid and being open to external trade, the economic growth rates of Pacific Island countries are the lowest and most volatile for all groups of developing countries. This paper examines the impact of Foreign Direct Investment (FDI) to the Pacific region. Results from the estimation of a number of empirical models suggest that the impact of FDI is lower in Pacific countries than it is in host countries on average. A 10% increase in the ratio of FDI to host Gross Domestic Product (GDP) is associated with higher growth of about 2% in all countries on average. The impact in Pacific countries falls to between 0.1 and 0.4%. A number of explanations for this finding are provided including some empirical evidence that FDI displaces domestic investment in the region.