Empirical Studies on Foreign Direct Investment

Foreign direct investment (FDI) plays a crucial role in providing resources to finance the development strategies of developing nations. Therefore, policy makers and development agencies alike believe that FDI is growth enhancing, as suggested by their policy measures to promote FDI. This dissertation consists of three empirical essays that seek to examine the determinants of FDI and its growth enhancing effects without hurting future generations. The first empirical study examines the effect of financial market development (FMD) as both pull and push factors in the determination of bilateral flow of FDI using the gravity model with a panel dataset of 20 source countries and 33 host countries over the period 2001-2012. Using equity to total assets and net loans to total assets ratios as novel measures of FMD, the results from both linear estimation and non-linear estimation methods suggest especially in the host country that, porous financial market hurts the bilateral flow of FDI. The second empirical study looks at the growth enhancing effects of FDI conditioned on FMD. The novelty of this chapter is that it uses a unique banking dataset on financial fragility indicators by Andrianova et al. (2015) to account for the possible market fragility in FMD in the FDI-growth nexus. Under the instrumental variable approach, the study reveals that FDI inflows has a marginally significant positive impact on economic growth, indicating that fragility in financial market development can weaken the growth effect of FDI inflows. The third empirical study focuses on the impact of inward FDI on the environment. Under both static and dynamic panel data estimations, the results show a positive relationship between FDI inflows and environmental pollution. Additionally, results of a group-wise estimation indicate that there are differences in terms of the impact of FDI inflows on the environment by the various groupings.