Determinants of Foreign Direct Investment and Its Impact on Economic Growth in Developing Countries

Abstract

By bridging the gap between domestic savings and investment and bringing the latest technology and management know-how from developed countries, foreign direct investment (FDI) can play important role in achieving rapid economic growth in the developing countries. The fact is that FDI mostly flows towards the developed countries and only a small portion of FDI flows to a limited number of developing countries. Thus, most of the developing nations almost fail to attract a handsome amount of FDI. Using panel data from 60 low-income and lower-middle income countries, this paper firstly identifies the influential factors that determine FDI inflow in the developing countries and secondly empirically demonstrates the relationship between economic growth and FDI. It is found that countries with larger GDP and high GDP growth rate and maintain business friendly environment with abundant modern infrastructural facilities, such as internet can successfully attract FDI and FDI on the other hand, significantly affect economic growth of a country.

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