The impact of foreign direct investment on economic growth: Empirical evidence in G20 countries

Abstract

This study investigates how foreign direct investment (FDI) affects economic growth in G20 countries. It uses annual panel data from 19 countries for the years 2001 and 2022. In addition to FDI as the main independent variable, the study includes control variables such as exchange rates, trade balance, inflation, government effectiveness, and gross fixed capital formation. The relationship between economic growth and FDI is analyzed using Johansen's cointegration method and a vector error correction model. First, unit root tests were conducted using the Augmented Dickey-Fuller (ADF) test. Granger causality tests were also applied to identify the direction of causality between FDI and economic growth. To ensure the reliability of the results, three different panel linear regression models were used to confirm the robustness of the findings. The results from all econometric models consistently show that FDI has a positive and statistically significant effect on the economic growth of G20 countries. Additionally, gross fixed capital formation and exchange rate appreciation were found to have positive and significant effects on economic growth. On the other hand, inflation and trade openness negatively impacted economic growth. Government effectiveness was found to be insignificant, and its moderating role was not further analyzed. Based on these findings, the study recommends that governments implement policies to attract FDI, as it promotes technology transfer, increases market competition, and introduces new expertise, all of which contribute to economic growth. Additionally, governments should create a stable economic environment by implementing strict monetary policies to control inflation and support long-term economic development .