How does FDI matter for economic growth? : evidence from a comparative study in country groups by level of development

This paper investigates the impact of FDI inflows on economic growth in groups of countries at different levels of development. The research was carried out between 2002 and 2019, encompassing a total of 138 countries. These countries were categorized by the United Nations into three groups: developed, developing, and underdeveloped countries. We use the instrumental variable two-stage least square (IV-2SLS) fixed-effect model for the estimation process, and the findings support the growth stimulus factor of FDI. However, the size of the FDI growth effect varies among country groups. FDI inflows have the largest growth effect in developing countries, followed by underdeveloped countries, and the growth effect is smallest in developed countries. Further study using the two-step system GMM estimation for a dynamic panel data model also confirms an inverted U-shaped curve for the impact of FDI inflows on growth rate of GDP per capita in country groups by level of development. Since developing countries benefit the most from FDI, they have more chances in the income catching-up process with developed countries. Having a relatively smaller size of FDI growth effect, underdeveloped countries face the danger of widening the income gap with developing countries.