Causal Relationship between Foreign Direct Investment, Trade and Economic Growth: A Cross Country Analysis

Abstract

The study empirically investigated the casual link between foreign direct investment, trade and economic growth in case of Pakistan, India and Bangladesh. For empirical purpose we used annual time series data for the years 1980-2010. In this study it is tried to find out that is there casual link between FDI trade and GDP in case of selected countries, and if causality exists then what is the direction of causality. ADF unit root test is used to check the stationarity of the data. Granger causality test has been used for estimating the casual relationship. Auto Regression Distributive Lag is used to estimate long run and short run relation among the variables. The empirical results revealed that all the variables are integrated of order one. Empirical results of Granger causality test revealed that in case of Pakistan there is bidirectional causality between FDI and economic growth and unidirectional causality from FDI to trade. In case of India there is unidirectional causality from economic growth to remittances and from remittances to trade. Furthermore, in case of Bangladesh there is unidirectional relationship between FDI to economic growth, trade to economic growth, remittances to economic growth and trade to FDI while bidirectional causality from between remittances and FDI and remittances and trade.

Keywords: Gross Domestic Product; Foreign Direct Investment; Exports; Granger Causality