The effect of FDI on trade-led growth hypothesis: a co-integrated panel analysis

The paper explores the role of foreign direct investment (FDI) on the trade-led growth hypothesis in three countries, namely Australia, Canada and Israel for the period 1965-2009. The empirical investigation is based on panel co-integration and causality tests. The results provide clear support of a long run co-integration relationship after allowing for the heterogeneous country effect. The causality test confirms the presence of long-run and short-run bidirectional causality between openness and economic growth. It also confirms the presence of unidirectional causality from economic growth to foreign direct investment, but not vice versa. Moreover, at the individual level, foreign direct investment causes economic growth in the Australian economy only. This result indicates that economic growth may harm openness and foreign direct investment in these three countries.