Does Foreign Direct Investment Promote Economic Growth? Evidence from a Threshold Regression Analysis

Using threshold regression techniques developed by Caner and Hansen(2004), this paper examines whether the effect of foreign direct investment (FDI) on economic growth is dependent upon different absorptive capacities. There are three absorptive capacities, namely, initial GDP, human capital and the volume of trade, that are used as threshold variables in our paper. The empirical analysis shows that FDI alone plays an ambiguous role in contributing to economic growth based on a sample of 62 countries covering the period from 1975 through 2000. Under the threshold regression, we find that initial GDP and human capital are important factors in explaining FDI. FDI is found to have a positive and significant impact on growth when host countries have better levels of initial GDP and human capital.