Assessing the Effect of Foreign Direct Investment on Economic Growth in Host Countries Using the Bayesian Econometrics

The importance of investment in accelerating economic growth is discussed widely in literature. Evidence in the existing empirical literature on the causal relationship between foreign direct investment (FDI) and economic growth is rather inconclusive. Most of these studies conduct traditional causality tests, using single time series or panel data, while we use the Bayesian econometrics to analyze. The questions of this research are whether FDI influences economic growth in the host countries? And if the answer is yes, how strong is impact of FDI on these countries ’ economic growth in long-term compared to domestic investment? The results show that foreign direct investment has a significant positive impact on economical growth in the sample host countries with a high probability occurrence rate, but its impact on growth is lower than domestic investment. These results are supported by another two indices of the Bayesian econometrics: the “posterior odds ratio ” and “model probability”