The Interactive Relationship between Economic Growth and Foreign Direct Investments (FDI): A VAR Analysis in Iran

Author

Department of Economics, University of Isfahan, Isfahan, Iran

Abstract

T





he impact of FDI on economic growth is neither homogeneous, nor completely clarified. Due to accumulation of capital in the host economy, FDI is expected to encourage the incorporation of new inputs and technologies in the process of production. However, the impact of FDI on economic growth is not so shaped up in empirical studies. Accordingly, while some studies remarked a positive impact of FDI on economic growth, others showed a negative relationship between the two variables. In this paper, we will analyze absorb methods of foreign investment, effective factors in foreign direct investment (including economic, encouragement and protection, and natural and politic factors), and connection between foreign direct investment and growth. We carried out an analysis of vector autoregressive (VAR) type, so as to identify the relationship between FDI and economic growth in Iran over the period 1991–2014. Result shows that economic growth and foreign direct investment have a positive impact on each other; hence there is a reciprocal relationship between them. Also, Granger causality test for GDP growth and foreign direct investment indicate that a reciprocal relationship exists between these two variables.
 

Keywords


Ahmadi, R., & Ghanbarzadeh, M. (2011). Openness, Economic Growth and FDI: Evidence from Iran. Middle-East Journal of Scientific Research, 10(2), 168–173.
Alfaro, L., Kalemli-Ozcan, S., & Volosovych, V. (2008). Why Doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation. Review of Economics and Statistics, 90, 47–68.
Alizadeh, M., Babaei, M., Jafari, M., & Khodaee, M. (2014).  Interactions among FDI and Economic Growth in D8 Members. Quarterly Journal of Economic Research and Policy, 6, 87–104
Asheghian, P. (2016). GDP Growth Determinants and Foreign Direct Investment Causality: the Case of Iran. The Journal of International Trade and Economic Development, 25(6), 897–913.
Bajo, R., & Simon, S. (1994). An Econometric Analysis of Foreign Direct Investment in Spain, 1964–89. Southern and EconomicJournal,1(61), 104–120.
Behname, M. (2011). Studying the Effect of Foreign Direct Investment on Economic Growth in Greater and Traditional Middle East Countries. Journal of Economic Analysis, 3(45), 35–43.
Borensztein, E., Gregorio, J., & Lee, J. (1998). How Does Foreign Direct Investment Affect Economic Growth. Journal of International Economics, 45(1), 115–135.
Chang, S., (2006). The Dynamic Interactions among Foreign Direct Investment, Economic Growth, Exports and Unemployment: Evidence from Taiwan. Economic Change, 38, 235–256.
Chakraborty, C., & Basu, P. (2002). Foreign Direct Investment and Growth in India: A Cointegration Approach. Applied Economics, 9(34), 1061–1073.
Choi, C. (2004). Foreign Direct Investment and Income Convergence. Applied Economics, 10(36), 1045–1049.
Cichy J., & Gradoń W. (2016). Innovative Economy and the Activity of Financial Market Institutions. Case of Poland. Journal of International Studies, 1(9), 156–166.
Clowes, D., & Bilan, Y. (2014). Tracking Income per Head in Central-Southern Europe: Country Responses to the Global Downturn (2008–2012). Economic Computation and Economic Cybernetics Studies and Research, 2(48), 1–14.
Deijpasand, F. (2005). The Determinants of  Economic Growth. Economic Research, 5(18), 13-47.
De Mello, L. R., (1999). Foreign Direct Investment-led Growth: Evidence from Time Series and Panel Data. Oxford EconomicPapers, 51(1),133–151.
Dodange, M. (2016). The Ways of Attraction of Direct Local and Foreign Investment in the Islamic Republic of Iran (Unpublished Doctoral Dissertation(. University of National Academy of Sciences, Armenia.
Dornean, A., & Oanea, D. C. (2013). Foreign Direct Investment and Post Crisis Economic Growth: Evidence from European Union. Revista Economica, 6(65), 46–60.
Dunning, J. (1993). Multinational Enterprises and the Global Economy. Wokingham: Addisson-Wesley Addison-Wesley.
Farzin, B., Ashrafi, Y., & Fahimifar, F. (2012). Foreign Direct Investment and Economic Growth. Quarterly Journal of Economic Research and Policy, 61, 29–62
Fidrmuc, J., & Kostagianni, S. (2015). Impact of IMF Assistance on Economic Growth Revisited. Economics & Sociology, 3(8), 32–40.
Gafari, F., & Akbari, J. (2011). The Determinants of FDI in Oil Exporter Countries in Middle East. Quarterly Journal of Applied Economics, 7, 1–22.
Goldsmith, R. W. (1969). Financial Structure and Development. New Haven and London: Yale University Press. 
Grossman, G., & Helpman, E. (1991). Innovation and Growth in the Global Economy. Cambridge: MIT Press.
Hojabr K., & Sabzi. K. (2006). Estimating the Supply Function of Foreign Direct Investment in Iran. Journal of Economic Research, 6(3), 161–204.
Jalili, Z. (2013). Investigation the Relationship between Non-oil Exports, Foreign Investment and Economic Growth in the MENA Region. Quarterly Journal of Economic Growth, 4(13), 29–42.
Kherfi, S., & Soliman, M. (2005). FDI and Economic Growth in CEE and MENA Countries: A Tale of Two Regions. International Business & Economics Research Journal, 4(12), 113–120.
Khosrozadeh, A., Firoozjan, H., & Amirzadi, R. (2015). Effect of Trade Liberation and FDI on Iran Economic Growth. Indian Journal of Fundamental and Applied Life Sciences. Retrieved from http://cibtech.org/sp.ed/jls/2015/01/jls.htm
Lechman, E., & Kaur, H. (2015). Economic Growth and Female Labor Force Participation Verifying the U-feminization Hypothesis. Economics & Sociology, 1(8), 246–257.
List, J. A. (2003). Effects of Environmental Regulations on Manufacturing Plant Births: Evidence from a Propensity Score Matching Estimator. Review of Economics and Statistics, 85(4), 944–952
Mahmoodi, M., & Mahmoodi, E. (2016). Foreign Direct Investment, Exports and Economic Growth. Economic ResearchEkonomska Istraživanja, 29(1), 938–949.
McKinnon, R. I. (1973). Money and Capital in Economic Development. Washington, DC: Brookings Institution.
Mohammadvand Nahidi, M. R., Jaberi Khosroshahi, N., & Norouzi, D. (2012). The Determinants of  FDI in  Iran: Bonds Testing Approach. Economic Research - Ekonomska Istrazivanjal, 25(3), 560–579.
Moshiri, S., & Keyanpoor, S. (2012). The Determinants of FDI. Quarterly Journal of Quantitative Economics, 9(2), 1–30
Noorbakhsh, F., & Paloni, A. (2001). Structural Adjustment and Growth in Sub-Saharan Africa. Economic Development and Cultural Change, 49(3), 479-509.
Okodua, H., (2009). Foreign Direct Investment and Economic Growth: Co-Integration and Causality Analysis of Nigeria. The African Finance Journal, 11(1), 54–73.
Olayiwola, K., (2000). Foreign Exchange Constraints and Economic Development in Nigeria: Is There a Role for Trade and Exchange Rate Policies? (Unpublished Doctoral Dissertation), University of Ibadan, Nigeria.
Rahmani, T., & Motamedi, S. (2013). The Impact of Foreign Direct Investment on Capital Formation, Productivity and Economic Growth in Developing Countries. Quarterly Journal of Economic Growth and Development, 2(12),12–32.
Rana, P. B., & Dowling, J. M. (1998). Foreign Capital and Asian Economic Growth. Asian Development Review, 8, 77–102.
Shah Abadi, A., & Mahmoodi, A. (2006). Determinants of Foreign Direct Investment in Iran. Journal of Jostarha, 3(5),89–126.
Shaw, E. S. (1973). Financial Deepening and Economic Development. New York: Oxford University Press.
Wang, J. Y., and Blomstrom, M. (1992). Foreign Investment and Technology Transfer, a Simple Model. European Economic Review, 36(1), 137–155.
Wheeler, D., & Mody, A. (1992). International Investment Location Decisions. Journal of International Economics, 33, 57–76.