Foreign Direct Investment and Economic Growth: Evidence from Ten East Asian Economies

Abstract

The boom of inward foreign direct investment (FDI) in East Asia since the mid-1980s and the recent Asian financial crisis raise the critical question of how FDI affects host economies. While there is considerable evidence on the link between FDI and economic growth, the causality between the two variables has not been investigated in a reasonable theoretic framework with a reliable procedure. This paper examines the issue by using data for ten East Asian economies. Although the impact of foreign portfolio investment on East Asian economies is uncertain, FDI might be expected to boost host economic growth via technological upgrading and knowledge spillovers. The empirical results suggest that FDI seems to enhance economic growth in the long run for five economies (China, Hong Kong, Indonesia, Japan, and Taiwan) and in the short run for one country (Singapore).

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