This document outlines the research conducted by Joseline Nicholas of McMaster University on the relationship between foreign direct investment (FDI) and economic growth. The research used panel data from 23 years and 6 countries to examine this relationship across different sectors. The results found a positive relationship between FDI and growth, though the impact varied across sectors. Some sectors showed no evidence of FDI enhancing growth. The implications are that the effect of FDI on economic growth is not equally distributed across all sectors.

1. JOSELINE NICHOLAS
DEPARTMENT OF ECONOMICS, MCMASTER
UNIVERSITY

2. Outline
 Economic Question
 Economic policy
 Research
 Source of Data
 Empirical Methods
 Tables 1 to 6
 Results
 Implications
 Internal Strengths
 Internal Weaknesses
 External Strengths
 External Weaknesses
 Question for Discussion

3. Economic Question
 Does FDI facilitate economic growth in host
countries?
Policies
- FDI policies
- Is allowing more FDI inflows one of the great
policies that would foster economic growth?

4. Article
 Bang, T. & Nob, I., (2009), Sectoral analysis of
foreign direct investment and growth in the
developed countries. Journey of International
Financial Markets, Institutions and Money. Vol
19(2) 401-413.
 Economic question and policies are the same as
my research paper

5. Literature
 Li and Liu (2005) found that FDI affects growth both
direct and indirectly through its interaction with
human capital
 De Mello (1999) found a positive effect of FDI on
economic growth both in developing and developed
countries
 Durham (2004) found that only countries with strong
institutional development and investor-friendly trade
policies enjoy the impacts of FDI on economic
development.

6. Data
 Panel data for 23 years (1980-2003), 6 countries.
 Sources:
 OECD Structural Statistic Analysis (STAN), 2006
edition.
 Value added, investment, employment
 International Direct Investment Statistics Yearbook
 Only 12 sectors match with STAN
 United nations database
 Secondary school enrollment
 International country risk guide

7. Variables
 Dependent variable
 Growth, measured by value added
 Independent Variables
 Log of FDI
 Log of labour
 Interaction of FDI and log of labour
 Log of capital

8. Model
 VAL= Value added
 FDI= Log of FDI
 LAB=Labour
 FDILAD=Interaction between FDI and log of labour
 CAP= Capital
 CON= Other control variables
 Dummy variables include i=sector; c=country; t=year

9. Table 1
 Column 1.1 (all variables but FDI AND FDILAB
 Column 1.2 (all variables but FDILAB)
 Column 1.3 (all variables but FDI)
 In column 1.4 (all variable)
 FDI is significant at 1% & FDILAB significant at 10%

10. Table 2
 Regression on Data for 1992-2003
 Column 2.1 (all variables but FDI AND FDILAB
 Column 2.2 (all variables but FDILAB)
 Column 2.3 (all variables but FDI)
 In column 2.4 (all variable)
 FDI is significant at 1% & FDILAB significant at 10%
 Equivalent results, FDI has bigger coefficient in 2.2

11. Table 3 (Sectoral effects)
 3.3 ( only FDILAB) Results reveal that the indirect
effects of FDI on growth via interaction with labor also
differ across sectors.
 3.4 ( FDILAB), results are different; all sectors have
positive and significant coefficients except for financial
intermediation.
 THEREFORE: the impact on FDI on economic activity
is substantially different across production sectors.

12. Table 4
 FDI has positive and significant effect on the level
of technology in the OECD, as measured by TFP.

13. Table 5
 Columns 5.1 and 5.2 report the effect of FDI on
domestic capital. They show that FDI causes
“crowding in” effects on real estate, oil and
chemical, machinery, and trade and repair sectors.
The effects on other sectors are not statistically
significant.
 Columns 5.3 & 5.4 significance varies across
sectors

14. TABLE 6- Country-specific and sector-
specific effects of FDI on economic growth
(GDP g. rate)
 Show that FDI effects on growth are only positive
and significant for the United States and the
Netherlands.
 FDI effects on growth for each of the other
countries in the G6 are not significant

15. Results
 Results from this study show a significant
and positive relationship between FDI and
economic growth, which is not equally
distributed across sectors.

16. Policy implications
 Effect of FDI on economic growth is not
equally distributed across sectors. In some
sectors, we find no evidence that FDI
enhances economic growth.

17. Internal Strengths
 Country, sector and time fixed effects controlled for.
 Time-series data allows for researcher to capture social
and economic changes and effects over the course of 23
years.
 Countries with missing or inaccurate data were
excluded

18. Internal Weaknesses
 Mismatch of data between STAN and IDI
 Missing data and estimation
 Sectors reduced From 32 to 12
 Out of 12 sectors, data on R&D, imports
and exports mismatch in 5
 School enrollment not an accurate measure
of human capital

19. External strengths
Multiple sectors of the economy were
surveyed
Study conducted in OECD countries,
hence results are valid in Canada, USA,
Germany, Denmark, Netherlands,
Spain, UK.

20. External Weaknesses
Study may not apply developing
countries. The effect of FDI on
economic growth could vary based on
country’s ability to
Choice of industries and companies is
not random, it’s driven by data
availability

21. Question for discussion
Spill overs- Could there be any
possibilities that FDI in certain sectors is
more productive in generating value added
in other sectors