Foreign Direct Investment, External Debt and Economic Growth: Evidence from Some Selected Developing Countries

Purpose: The aim of this paper is to analyze the relationship between foreign direct investment, external debt and economic growth. The study is based on a sample of 25 region wise selected developing countries. Panel unit root tests suggest that selected variables are stationary at the level of first difference. Using data from 1990 to 2014, results of FMOLS method suggest that the core variables, foreign direct investment and External Debt have significant positive relationship with economic growth. Labor, Gross Domestic Saving and Government expenditures have positive while Gross capital formation exerts negative impacts on economic growth. Moreover, FDI exerts outstanding effects on growth because one unit rise in FDI raise the growth by 4.03 units while one unit rise in external debt upgrade the growth up to 2.13 units. It means that boundaries of selected developing nations are absorbent to FDI than external debt. The results of “Johansen Fisher Panel Co-integration test” reveal that, there exists a long period relationship among all the explained and explanatory variables. In order to investigate the causal relation among selected variables, pair wise granger causality test is employed