Foreign direct investment, human capital and non-linearities in economic growth

This paper makes a contribution to the existing literature on the foreign direct investment (FDI) and economic growth nexus by contrasting past empirical evidence and conventional wisdom and arriving at some interesting new results. By applying non-parametric methods, and thus taking into account non-linear effects of initial income and human capital on economic growth, we explore the FDI effect on growth in much greater detail than previous studies. Our findings not only confirm the non-linear effect of human capital in the presence of FDI inflows but also suggest that FDI inflows are growth enhancing in the middle-income countries while there is a 'two-regime' FDI effect for high-income countries. This new finding appears to be independent of OECD country membership.