The Determinants and Growth Effects of Foreign Direct Investment: A Comparative Study

This study examines the factors determining inward foreign direct investment (FDI) and its effects on productivity, ultimately contributing to economic growth. Using a two-step generalized method of moments (GMM) approach, we analyzed a panel of 84 countries, comprising 34 OECD and 50 non-OECD countries, from 2010 to 2019. The findings suggest that FDI positively impacts productivity and benefits both OECD and non-OECD countries. Economic freedom plays a significant role in attracting FDI, particularly in OECD countries, and contributes to economic growth in non-OECD countries. However, economic freedom alone does not guarantee strong economic growth in OECD countries but significantly enhances growth in non-OECD countries. The results also highlight that only economies with robust economic infrastructure and development levels benefit more from FDI. It appears that FDI by itself has no direct effect on output growth. Instead, the impact of FDI is contingent on the level of economic freedom in the host countries. This paper presents a key finding on how policy decisions influence the effects of foreign capital investment on productivity and income. It indicates that countries promoting economic freedom can more effectively leverage productivity gains from FDI.