The foreign direct investment-economic growth nexus

The nexus between foreign direct investment (FDI) and economic growth has been a long-standing debate from mixed empirical findings. There is also a possibility of a bi-directional relationship between FDI and economic growth. This paper investigates FDI-growth associations using a simultaneous system of equations approach of 124 cross-country data for the period 1971-2010. Results from the estimation indicate that overall effects of FDI are positively associated with growth and vice versa; whereas labor force, trade openness and economic freedom are other key determinants of FDI, which in turn stimulate income growth further.