Dynamic Relationship between Growth, Foreign Direct Investment and Exports in the US: An Approach with Structural Breaks

One of the well-studied areas in development economics is the relationship between Foreign Direct Investment (FDI) and economic growth. Recently, a renewed interest has been observed in growth determinants and externality-led growth, with the advent of endogenous growth theories (Barro, 1991; and Barro and Sala-i-Martin, 1995). Under this framework, it is more plausible to include FDI as one of the determinants of long-run economic growth. The present paper investigates the relationship (long run and short run) between economic growth, FDI and exports for the US economy. To achieve this objective, Johansen maximum likelihood procedure is used. The results show the presence of one cointegrating vector. Further, the results of Bai-Perron test reveal two structural breaks, and that of block exogeneity Wald test show causality running from exports to GDP and FDI, and also from GDP to FDI.(ProQuest: ... denotes formulae omitted.)IntroductionOne of the most important indices for any country is economic growth. Increase in economic growth shows increase in social welfare and long-term economic development, and that is the reason why the government is concerned about finding ways to promote the economic growth of the country, for which it devises many plans and policies. Looking at economic theory, we can find many variables such as human capital, physical capital, technology, etc. that are effective on economic growth. In the past two decades, Foreign Direct Investment (FDI) has been studied as an important factor affecting growth and development. The effect of FDI on the host country's economic growth has been most intensively debated in the literature because of its controversial character. (For definitions of FDI see Anghel, 2002; Accolley, 2003; Durroset, 2005; Voinea, 2007; and Ranjan and Agrawal, 2011.)The literature has considerable volume of research on the subject, but the results are conflicting regarding how FDI relates to economic growth. More specifically, the literature discusses the two-way interaction between FDI and growth. There are two opposing groups of researchers. On the one hand, we have researchers who consider FDI as an important element in the solution to the problem of scarce local capital and overall low productivity in many developing countries (DeMello, 1999; and Eller et al., 2005). Therefore, they argue that the flow of foreign direct capital is a potential growth-enhancing player in the receiving country. But this view is challenged by the other group. Carkovic and Levine (2005) find that there is no robust impact of FDI on growth if the country-specific level differences, endogeneity of FDI inflows and convergence effects are taken into account. Furthermore, Akinlo (2004) finds that both private capital and lagged foreign capital have no statistically significant effect on economic growth.Meanwhile, several researchers argue that through rapid growth of an economy, it is possible for the Multinational Companies (MNCs) to attract more FDI, because they manage to locate new profit opportunities (Hansen and Rand, 2006).Generally, the existing literature has provided conflicting predictions concerning the growth effects of FDI. The proponents of positive effects of FDI on economic growth believe that it could stimulate technological change through adoption of foreign technology and know- how and technological spillovers, thus modernizing the host country. The opponents argue that FDI may lead to crowding out effect on domestic investment, external vulnerability and dependence, destructive competition of foreign affiliates with domestic firms, and 'market- stealing effect' as a result of poor absorptive capacity. Against this backdrop, the present paper investigates the long-run and short-run relationship between economic growth, FDI and exports for the US.The rest of the paper is structured as follows: it presents a brief review of related literature, followed by a description of the data and methodology used in the analysis. …