Impact of FDI on Economic Growth: The Key Drivers

Abstract

To achieve Millennium Development Goals (MDGs) by 2015 there is need for enhanced global partnerships in areas such as trade, health, security and education. Owing to these initiatives FDI, official foreign development assistance and other external capital flows are gradually becoming economic stimulants in many developing countries. In 2000 FDIs received by developing countries was estimated at 19% of total global FDIs compared to 52% in 2010. FDIs accounts for 11% of global GDP and creates close to 80 million jobs globally. Global FDI totaled to US$ 1.2 trillion in 2010, US$ 1.4 2011 and US$ 1.8 in 2012 equally the developing countries received half of the FDI and invested a quarter of the FDI out flow. FDI contributes to economic growth though through intervening variables. This paper sought to explain the effect of FDI on the determinants of economic growth Human Capital development, Financial Sector Development and Health Care and Trade openness. A sample of 30 countries was used. Data was collected from UNCTAD and World Bank for the period 1980-2012 and analyzed using fixed effect regression. The results of the study show that FDI had a positive impact on measures of financial sector development and trade openness. However the effect of FDI on human capital development was negative. The study recommend the need for favorable monetary policies that elicit more FDI for enhanced economic growth. Finally the study recommends that additional FDIs should be directed towards drivers of human capital development.

Keywords: FDI, Economic Growth, Human Capital Development, Financial Sector Development, Trade Openness