Impact of Foreign Direct Investment and Trade on Economic Growth: Evidence from Developing Countries

Abstract

Foreign direct investment (FDI) and trade are often seen as important catalysts for economic growth in the developing countries. FDI is an important vehicle of technology transfer from developed countries to developing countries. FDI also stimulates domestic investment and facilitates improvements in human capital and institutions in the host countries. International trade is also known to be an instrument of economic growth (Frankel and Romer). Trade facilitates more efficient production of goods and services by shifting production to countries that have comparative advantage in producing them. Even though past studies show that FDI and trade have a positive impact on economic growth, the size of such impact may vary across countries depending on the level of human capital, domestic investment, infrastructure, macroeconomic stability, and trade policies. The literature continues to debate the role of FDI and trade in economic growth as well as the importance of economic and institutional developments in fostering FDI and trade. This lack of consensus limits our understanding of the role of FDI and trade policies in economic growth processes and restricts our ability to develop policies to promote economic growth. This article analyzes the role of FDI and trade in promoting economic growth across selected developing countries and the interac-tion among FDI, trade, and economic growth. We examine data from sixty-six developing countries over the last three decades. Our