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The Importance of Social Factors when assessing the impact of foreign direct investment on economic growth

Xuan-Vinh Vo and Jonathan A. Batten

Employing a panel data modelling technique, we provide the answers to two critical research questions: what is the linkage between FDI and economic growth and does this relationship change under different legal, institutional, educational and economic conditions? Overall the analysis supports the view that FDI has a stronger positive impact on economic growth in countries with a higher level of education attainment, openness to international trade and stock market development, and a lower rate of population growth and lower level of risk. Thus countries undertaking reform of cross-border capital restrictions and controls and other policy aimed at encouraging domestic and foreign investment need to incorporate broader social policy objectives –such as education, legal and institutional reform- to maximise the benefits from FDI.

JEL Classification: F3, F4, F16
Keywords: foreign direct investment, economic growth, panel data, social policy

Last updated 28 August 2014 by IIIS (Email).