The Universality of Foreign Direct Investment, Foreign Aid, and Domestic Investment on Economic Growth
A Multi-Panel Analysis of Developing Countries, 1993-2022
DOI:
https://doi.org/10.51415/22gbva26Keywords:
Panel data analysis, Economic growth,, Domestic investment,, Foreign aid, Foreign direct investment (FDI),Abstract
This study examined the impact of foreign direct investment, foreign aid, and domestic investment on the economic growth of 66 developing countries across four regions–Transitioning Economies, African Developing Countries, Asian Developing Countries, and Latin American and Caribbean Developing Countries from 1993 to 2022. Using panel data analysis with fixed- and random-effects models, we account for serial correlation and heteroskedasticity by clustering standard errors. Economic growth, the dependent variable, was measured by the GDP growth rate. The results showed that domestic investment consistently drives economic growth, while education expenditure negatively affects growth across all regions except Africa. Foreign aid has an insignificant effect on growth in most regions. The findings highlight the importance of domestic capital formation while also questioning the short-term effectiveness of foreign aid in spurring economic growth in developing countries. Tailored policies are recommended for each region to achieve sustainable economic growth; hence, the universality of the FDI-led growth hypothesis and the aid-led growth thesis is too optimistic for developing countries.
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