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GTAP Resource #2071

"Impact of Foreign Direct Investment and Trade on Economic Growth"
by Makki, Shiva, Agapi Somwaru and Manitra A. Rakotoarisoa

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.

This paper analyzes the role foreign direct investment and trade on economic growth of small and large developing countries within the framework of endogenous growth theory. Our analysis, based on cross sectional data of a sample of 66 developing counties over three decades, indicates that FDI and trade contribute significantly towards advancing economic growth in developing countries. We show that FDI interacts positively with trade and stimulates domestic investment. Sound macroeconomic policies and institutional stability are necessary pre-conditions for FDI-driven growth to materialize. Our results imply that lowering inflation rate, tax rates, and government consumption would promote economic growth in developing countries.

Resource Details (Export Citation) GTAP Keywords
Category: 2006 Conference Paper
Status: Published
By/In: Presented at the 9th Annual Conference on Global Economic Analysis, Addis Ababa, Ethiopia
Created: Somwaru, A. (5/1/2006)
Updated: Batta, G. (5/3/2006)
Visits: 2,970
No keywords have been specified.

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