Causal relationship of gross domestic saving and economic growth
As an outgrowth of dependency theories of national development, there have been a large number of cross-national empirical studies of the effects of foreign investment and aid on economic growth and inequality. Research review literature studies in order to discover what can be concluded about the relationships. The method is to discuss the conceptualization of the four main variables at issue, discuss the differences in the research designs and measurement in research base and compare results and explain contradictory and inconsistent findings. The effect of direct foreign investment and aid has been to increase economic inequality within countries. Flows of direct foreign investment and aid have had a short-term effect of increasing the relative rate of economic growth of countries. Stocks of direct foreign investment and aid have had the cumulative, long-term effect of decreasing the relative rate of economic growth of countries. The relationship has been conditional on the level of development of countries.
The stocks of foreign investment and aid have had negative effects in both richer and poorer developing countries, but the effect is much stronger within the richer than the poorer ones. These relationships hold independently of geographical area. Research will attempt to show causal relationships between economic growth and FDI and GDI in countries over the period 2000-2008, by using panel model to show that FDI Granger-causes economic growth, and vice versa, the effects are rather more apparent from growth to FDI than from FDI to growth. GDI does not Granger-cause economic growth, but economic growth robustly Granger-causes GDI Strong positive associations between economic growth and FDI inflows or GDI rates do not necessarily mean that high FDI inflows or GDI rates lead to rapid economic growth. To investigate whether foreign direct investment (FDI) affects economic growth based on panel of data for certain countries, single equation and simultaneous equation system techniques are applied to examine this relationship. FDI not only directly promotes economic growth by itself but also indirectly does so via its interaction terms. The interaction of FDI with human capital exerts strong positive effect on economic growth in developing countries, while that of FDI with the technology gap has significant negative impact.
Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment. Growth rates are positively related to measures of political stability and inversely related to a proxy for market distortions. The purpose is to analyze the effects of economic openness and increasing capital mobility on the economic growth. The remarkable increase in FDI flows to developing countries over the last decade has focused attention on whether this source of financing enhances overall economic growth to use mixed fixed and random (MFR) panel data estimation method to allow for cross country heterogeneity in the causal relationship between FDI and growth and contrast our findings with those from traditional approaches. Relationship between investment, both foreign and domestic, and economic growth in developing countries is highly heterogeneous and that estimation methods which assume homogeneity across countries can yield misleading results. There is some evidence that the efficacy of FDI in raising future growth rates, although heterogeneous across countries, is higher in more open economies. The relationship between investment, foreign and domestic, and economic growth in developing countries is highly heterogeneous. Second, despite the large amount of variation across the countries in panel, there can draw some policy relevant inferences from this analysis. While domestic investment seems be strongly correlated contemporaneously with growth, it is not as strong causal determinant of future growth as foreign direct investment.
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