Endogenous Specification of FDI and Economic Growth: Cross–Economies Evidence

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Adil H. Suliman; Mohammad I. Elian; Hamid Eltgani Ali

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Research Article

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International Journal of Business

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By using panel data from the Economic and Social Commission for Western Asia (ESCWA) countries from 1980-2011, this article tests simultaneously for the endogenous association between Foreign Direct Investment (FDI) and economic growth by controlling FDI-growth deriving regressors. To control for the simultaneity bias, Two-Stage Least Squares (2SLS) estimators are used to test for our proposed simultaneous equation system. In addition, we verified the robustness of our results by using the Generalized-Method of Moments (GMM) by adding moment conditions under the assumption that the past value of the explanatory variables are uncorrelated with the error term. The results substantiated that FDI positively and significantly boosts growth and the growth rate stimulates positively FDI inwards as well. The results have some policy attributes including promoting the notion that broad based and sustainable economic growth can be achieved by increasing the share of FDI inwards.

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