Economic Growth and FDI: A panel data causality analysis

Abstract

This thesis examines the causal relationship between Foreign Direct Investment (FDI) and Economic Growth in 15 European countries. The panel data consists of annual observations on FDI and GDP for the period 1971-2019. Firstly, I test for Cross-sectional Dependence to examine the existence of sectional dependence between the sample countries. Secondly, I run a second-generation panel unit root test to examine the stationarity of the variables and the integration approach ARDL methodology to estimate the short- and long-term coefficients. In addition, I test for Granger causality, as well as compute the IRF and perform variance decomposition. Finally, the analysis supports the existence of a long-term relationship as well as the indication of Granger causality from GDP to FDI, a result that is consistent with the empirical literature for developed countries.