FDI and Economic Growth: Causality for the EU and ASEAN

This study attempts to address the causal-order between inward FDI and economic growth using a panel data set for two different Economic Associations that is EU (European Union) and ASEAN (Association of South Eastern Asian Nations) over the period 1970-2003. The inflows of FDI to developed host countries raise the question of how these inflows affect their economies and what is the interaction between FDI and growth. While there is considerable evidence on the link between FDI and Economic Growth , the causality between them has not been investigated in a reasonable procedure. Three possible cases are investigated in this paper 1) Growth-driven FDI, is the case when the growth of the host country attracts FDI 2) FDI-led growth , is the case when the FDI improves the rate of growth of the host country and 3) the two way causal link between them. Empirical results obtained from heterogeneous panel analysis indicate the following. Regarding the EU countries the results support the hypothesis of GDP -FDI causality (growth driven FDI) in the panel. Regarding the ASEAN, there is a two-way causality between GDP per capita and FDI like the cases of Indonesia and Thailand. In the cases of Singapore and the Philippines, howerver, FDI is motirated by host country’s. GDP growth. So, the resullts are path dependent and country-specific.