Integration of GDP and FDI in Economies at Different Stages of Growth

Abstract

The objective of this study is to analyze the relationship between FDI and GDP for countries representing developed, developing and underdeveloped economies around the world. The countries identified for the purpose are Bhutan, Ethiopia, India, Brazil, USA and UK. Johansen cointegration test reveals that long-run equilibrium relationship between the two variables exists for Ethiopia, India and UK only. The VEC model shows no related short-run causality for any of these three countries. The study has implications in terms of policy decisions. Using FDI to boost GDP growth rate in the short-run is not an effective option for any country under the study. Since the vector error correction (VEC) model suggests that the two variables have a statistically significant adjustment mechanism for India, the study concludes that India can use FDI to leverage her long-term GDP. No evidence of link between the state of development of economy and integration of FDI and GDP is found by the study.