Foreign Direct Investment, Sovereign Debt and Growth: Evidence for the Euro Area

Ai-Lian Tan and Normaz Wana Ismail
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Ai-Lian Tan: Lecturer, Department of Economics, Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Perak, MALAYSIA
Normaz Wana Ismail: Associate Professor, Department of Economics, Marketing and Trade Laboratory, Faculty of Economics & Management, Universiti Putra Malaysia; Serdang, MALAYSIA & Deputy Director, Agricultural Production, Institute of Agricultural and Food Policy Studies; Universiti Putra Malaysia, Serdang, MALAYSIA

American Journal of Trade and Policy, 2015, vol. 2, issue 2, 51-58

Abstract: In light of the global financial crisis, extensive implementation of fiscal stimulus packages has triggered an enormous soar in European public debt. While grappling with this albatross, the high debt level has aroused the paramount interest of this study and casts doubt on the role of sovereign debt in the linkage between FDI and economic growth. To this end, this study aims to assess the effects of debt on growth through the channel of FDI in European countries by applying Pooled Mean Group (PMG) estimation. The empirical findings, by and large, suggest that a lower growth performance is evident with the association of high government debt with foreign investment. In a nutshell, over-borrowing from public finance would crowd out private investment and hence stifle economic growth.

Keywords: FDI; global financial crisis; sovereign debt; economic growth (search for similar items in EconPapers)
JEL-codes: F21 (search for similar items in EconPapers)
Date: 2015
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