The impact of FDI on economic growth, inflation and unemployment in Saudi Arabia

Abstract

This research examines the role of foreign direct investment (FDI) to influence the macro economy of Saudi Arabia. This research considers gross domestic product (GDP), inflation and unemployment as the selected macroeconomic variables to evaluate the role of foreign direct investment while including other independent variables like gross fixed capital formation (GFCF), real effective exchange rate and exports. This research covers the sample period from 1992 -2017, using autoregressive distributed lag (ARDL) model which is appropriate when selected macroeconomic series are not of similar order of integration. This research also employs ARDL bound test and related error correction model to further validate the analysis. All the estimated parameters from ARDL, F bound test and error correction term confirm the positive and statistically significant long run impact of foreign direct investment on GDP. This study also finds positive and statistically significant impact of exports and real effective exchange rate on GDP in Saudi Arabia. This research provides an important insight for policy makers to facilitate more foreign direct investment in Saudi Arabia along with large exports volume. This research is an important contribution to the existing literature pertaining to the role of FDI to influence macro economy of Saudi Arabia, especially in the context of Vision 2030 which aims to facilitate foreign direct investment in the country.