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Liberalization, FDI, and Growth in Developing Countries: A Panel Cointegration Approach
Author(s) -
Basu Parantap,
Chakraborty Chandana,
Reagle Derrick
Publication year - 2003
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbg024
Subject(s) - cointegration , economics , foreign direct investment , causality (physics) , liberalization , international economics , monetary economics , macroeconomics , panel data , developing country , econometrics , market economy , economic growth , physics , quantum mechanics
Using a panel cointegration framework, the article explores the two‐way link between FDI and growth for a panel of 23 developing countries. In addition, it investigates the impact of liberalization on the dynamics of the FDI and GDP relationship. A long‐run cointegrating relationship is found between FDI and GDP after allowing for heterogeneous country effects. The cointegrating vectors reveal a bidirectional causality between GDP and FDI for more open economies. For relatively closed economies, long‐run causality appears unidirectional and runs from GDP to FDI, implying that growth and FDI are not mutually reinforcing under restrictive trade and investment regimes.