Foreign direct investment and economic growth: The case of Asian developing countries

Foreign direct investment plays an important role in economic growth. It flows to the developing countries fourfold from an annual average of $12.6 billion in 1980--85 to \$51.8 billion in 1992-93 and rose to $70 billion in 1994. During the period of 1992--1994, developing countries received 32\% of the world\u27s total foreign direct investment, up from 20\% in the first half of the 1980s. Foreign direct investment flow has sustained since 1982. Among the other developing countries, the Asian countries entered in the race of foreign direct investment and they received a lion share. The most important factors which make Asian countries attractive to foreign investors are rapid economic growth, cheap labor force, privatization programs opened to foreign investors and the liberalization of the foreign direct investment regulation framework. It has been proved by regression analysis that the main determinants for foreign direct investment have been the growth rate of gross domestic products, the labor cost, the openness of an economy and the real exchange rate which are accounted for 83% of the change in the inflow of such investment in Asian countries during 1983-1992. Foreign investment is positively related with the growth rate, the openness and the devaluation of exchange rate while it has a negative relation with labor cost. Asian countries have experienced the fastest economic growth in the world and remain the largest host region, accounting for 57 percent of the total developing countries\u27 foreign direct investment in 1992. The study shows that foreign direct investment plays a key role in the development process. It has a positive correlation with economic growth, domestic investment and foreign trade. For maintaining and increasing the growth rate, the inflow of the foreign direct investment should be increased by stabilizing the macroeconomic environment, reducing price distortions, liberalizing foreign exchange systems, deregulating investment procedures and increasing general economic efficiency