The effect of foreign direct investment on economic growth in developing countries

Abstract

The article considers analysing the effect of sector-specific foreign direct investment (FDI) (the primary, secondary, and tertiary sectors) on economic growth in 19 developing countries over the period 2005–2018. Variables such as human capital, domestic investment, financial development, openness of the economy, labour force, and arable land were included as control variables. A robust two-step system generalised method of moments (GMM) was utilised for the analysis of the data. The study found that FDI’s growth effect is indeed influenced by its sectoral composition in developing countries. The finding reveals that FDI in manufacturing has a positive and statistically significant influence on economic growth, whereas FDI in the tertiary sector has a statistically significant negative effect on economic growth, but FDI in the primary sector has a negative but negligible effect on economic growth. Lastly, it can be concluded from the above results that the more manufacturing FDI that countries attract, the greater their economic growth will be. In light of this, the countries should provide special incentives like tariff reductions, tax holidays, and cheap-rented land supplies in order to attract more manufacturing sector FDI.

Keywords:

• Foreign direct investment
• economic growth
• developing countries
• system-GMM
• sector-specific

Author contribution

All works of the article were equally done by all authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Notes on contributors

Ezo Emako

Ezo Emako is a Ph.D. candidate in development economics at Arba Minch University in Ethiopia.

Seid Nuru

Seid Nuru (Ph.D.) is an associate professor of economics. He is a lecturer and researcher at Arba Minch University.

Mesfin Menza

Mesfin Menza (Ph.D.) is a lecturer, researcher, and dean of the Business and Economics College at Arba Minch University.