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Does foreign direct investment generate economic growth? A new empirical approach applied to Spain

Does foreign direct investment generate economic growth? A new empirical approach applied to Spain
Does foreign direct investment generate economic growth? A new empirical approach applied to Spain

It is often asserted with confidence that foreign direct investment (FDI) is beneficial for economic growth in the host economy. Empirical evidence has been mixed, and there remain gaps in the literature. The majority of FDI has been directed at developed countries. Single-country studies are needed, due to the heterogeneous relationship between FDI and growth, and because the impact of FDI on growth is said to be largest in open, advanced developed countries with an educated workforce and developed financial markets (although research has focused on developing countries). We fill these gaps with an improved empirical methodology to check whether FDI has enhanced growth in Spain, one of the largest receivers of FDI, whose gross domestic product growth was above average but has escaped scrutiny. During the observation period 1984–2010, FDI rose significantly, and Spain offered ideal conditions for FDI to unfold its hypothesized positive effects on growth. We run a horse race between various potential explanatory variables, including the neglected role of bank credit for the real economy. The results are robust and clear: The favorable Spanish circumstances yield no evidence for FDI to stimulate economic growth. The Spanish EU and euro entry are also found to have had no positive effect on growth. The findings call for a fundamental rethinking of methodology in economics.

0013-0095
1-32
Bermejo Carbonell, Jorge
53b16b26-7c4e-41d0-83c0-5b98ffe07378
Werner, Richard A.
dc217378-eb19-4592-9be4-ab5f847b74a1
Bermejo Carbonell, Jorge
53b16b26-7c4e-41d0-83c0-5b98ffe07378
Werner, Richard A.
dc217378-eb19-4592-9be4-ab5f847b74a1

Bermejo Carbonell, Jorge and Werner, Richard A. (2018) Does foreign direct investment generate economic growth? A new empirical approach applied to Spain. Economic Geography, 1-32. (doi:10.1080/00130095.2017.1393312).

Record type: Article

Abstract

It is often asserted with confidence that foreign direct investment (FDI) is beneficial for economic growth in the host economy. Empirical evidence has been mixed, and there remain gaps in the literature. The majority of FDI has been directed at developed countries. Single-country studies are needed, due to the heterogeneous relationship between FDI and growth, and because the impact of FDI on growth is said to be largest in open, advanced developed countries with an educated workforce and developed financial markets (although research has focused on developing countries). We fill these gaps with an improved empirical methodology to check whether FDI has enhanced growth in Spain, one of the largest receivers of FDI, whose gross domestic product growth was above average but has escaped scrutiny. During the observation period 1984–2010, FDI rose significantly, and Spain offered ideal conditions for FDI to unfold its hypothesized positive effects on growth. We run a horse race between various potential explanatory variables, including the neglected role of bank credit for the real economy. The results are robust and clear: The favorable Spanish circumstances yield no evidence for FDI to stimulate economic growth. The Spanish EU and euro entry are also found to have had no positive effect on growth. The findings call for a fundamental rethinking of methodology in economics.

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Accepted/In Press date: 20 January 2018
e-pub ahead of print date: 22 January 2018

Identifiers

Local EPrints ID: 418719
URI: https://eprints.soton.ac.uk/id/eprint/418719
ISSN: 0013-0095
PURE UUID: e2340712-a308-4ce6-8b54-1b09b1a2b691

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Date deposited: 20 Mar 2018 17:30
Last modified: 13 Mar 2019 18:45

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