Unveiling the Determinants of Foreign Direct Investment and Economic Growth in Central Asia

Abstract

Empirical studies on the determinants of foreign direct investment (FDI) and the nexus between FDI and economic growth have reached mixed findings, leading to a long-standing debate among policymakers and researchers. This study explores the determinants of FDI and examines the impact of FDI on economic growth in Central Asian developing countries during 2000-2020. The Prais—Winsten regression with panels corrected standard errors and IV-2SLS estimation results indicate that trade openness, natural resources, and market size are the main factors determining the FDI location decisions of foreign investors in Central Asia. The estimates for economic growth suggest that foreign direct investment, natural resources, human capital, and infrastructure have a positive and significant impact on economic growth. On the contrary, the effect of trade openness is surprisingly negative.

The Role of Economic Freedom in the Relationship between Foreign Direct Investment and Economic Growth: Evidence from Former Socialist Countries

“…Recently, Kasimov and Saydaliev (2022) studied the determinants of FDI, and came to different conclusions about the relationship between FDI and economic growth. The authors explored the determinants of FDI and examined the impact of FDI on economic growth in Central Asian developing countries during 2000-2020.…”

“…Meanwhile, the overall share of regulatory or restrictive investment policies increased from 25% to 32% for 2019-2022(UNCTAD 2021. FDI inflows increased by 77% from $929 billion in 2020 to approximately $1.65 trillion in 2021.…”