Economic and Political Determinants of the Effects of FDI on Growth in Transition and Developing Countries

Abstract

This study investigates the role of human capital and political development in determining the

The economic growth and foreign direct investment nexus: Does democracy matter? Evidence from African countries

“…Since we include domestic investment as well in this regression, the positive impact of FDI, in this case, captures its indirect effects that are not reflected simply in physical capital accumulation. This finding supports and confirms the previous findings on the direct role of FDI as capital stock in augmenting domestic capital stock in host countries (Elkomy et al, ). In Model 2, when we add the interaction term between FDI and the democracy level in the analysis (Model 2), the impact of FDI on growth remains the same as before, positive and statistically significant.…”

“…However, the findings of these studies are mixed. While some studies detected an insignificant impact of FDI on growth in transition economies (e.g., Carkovic & Levine, ; Elkomy et al, ; Resnick, ), others detected significant negative impact (Resnick, ). According to Elkomy et al (), one possible justification for this mixed finding is that many of these studies focus on the first decade following economic and political liberalization where only a very few encompass relatively recent data covering the second decade since transition.…”

“…While there is little doubt in existing literature regarding the contribution of FDI inflows to augmenting domestic capital stock in host countries, there exists no clear consensus regarding their indirect growth effects in the form of technology spillovers and efficiency gains (Damijan, Knell, Majcen & Rojec, ). Recent empirical evidence shows that such indirect impact is influenced by the absorptive capacity of the recipient country in terms of, for example, the stock and level of human capital (Borensztein et al, ; X. Li & Liu, ), the degree of openness (Balasubramanyam, Salisu, & Sapsford, ), infrastructural development (X. Li & Liu, ; World Bank, ), the provision of new governance institutions (Azman‐Saini, Zubaidi, & Hook, ), the level of financial development (Adjasi, Abor, Osei, & Nyavor‐Foli, ; Agbloyor, Abor, Adjasi, & Yawson, ; Alfaro, Areendam, Kalemli‐Ozcan, & Sayek, ; Durham, ; Hermes & Linsenk, 2003; Omran & Bolbol, ) and good governance (Elkomy et al, ; Morrissey & Udomkerdmongkol, ).…”

“…However, less attention has been given to other important indirect mechanisms through which FDI can also contribute to such growth. This is because the new growth theory proposes that FDI also has indirect effects arising from technology spillovers and efficiency gains (Elkomy, Ingham, & Read, ). The empirical literature has identified three channels through which technology can spread from FDI to home companies: intraindustry (or horizontal) spillovers, interindustry spillovers (vertical linkages) and both intra‐ and inter‐industry spillovers (Iványi & Vigvári, ).…”

The Relevance of Political Stability on FDI: A VAR Analysis and ARDL Models for Selected Small, Developed, and Instability Threatened Economies

“…The results support the contention that FDI was drawn in by a strong bargaining context, but that it is not itself a particularly strong determinant of domestic economic and political outcomes. Elkomy et al (2016) have conducted their own empiric analysis upon 61 transition and developing countries for the period 1989 to 2013. The paper finds that there is no critical threshold of human capital requirement in order for the spillover effect of FDI to be achieved and further finds that domestic investments is a much more significant driving force in democratic countries (Elkomy et al 2016).…”