Foreign Direct Investment and Economic Growth in Transition Economies: A Panel Data Study

V. Cristina Iliuta and Rati Ram ()
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V. Cristina Iliuta: Economics Department, Illinois State University, Postal: 100 N University St # 142 Normal IL 61761-4402 USA ,, http://www.cob.ilstu.edu/
Rati Ram: Economics Department, Illinois State University, Postal: 100 N University St # 142 Normal IL 61761-4402 USA ,, http://www.cob.ilstu.edu/

Economia Internazionale / International Economics, 2005, vol. 58, issue 3, 337-352

Abstract: Noting the paucity of studies that relate foreign direct investment (FDI) with economic growth in transition economies, this paper uses panel data for 12 CEE countries covering the period 1991-2002 and estimates a fairly standard growth framework with several different procedures. Seven main points are noted. First, our flexible models reveal a dramatic cross-country heterogeneity in parameters for both FDI and domestic investment. Second, the observed heterogeneity makes it hazardous to articulate a general substantive statement about the role of FDI (or domestic capital) in growth. Third, if a general statement were based on the averages for individual-country estimates, one might say that both FDI and domestic capital contribute substantially to growth in these economies and the role of FDI appears stronger. Fourth, estimates from identical-parameter models show huge differences even from individualcountry averages, particularly for domestic investment. Fifth, a reasonable test indicates absence of any major specification error (or “feedback”) as well as heteroscedasticity. Sixth, fixed-effects and random-effects models, that permit limited parametric variability, yield fairly similar patterns which, however, are different from both identical-parameter and flexible models. Seventh, it is pointed out that even when FDI is observed to have high returns and thus to make a substantial contribution to growth in such aggregate models, it should be recognized that direct returns on FDI generally belong to the foreign investors.

JEL-codes: F21 F23 O40 O50 (search for similar items in EconPapers)
Date: 2005
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