Does Foreign Direct Investment cause long run Economic Growth? Evidence from the Latin America and the Caribbean Countries

The empirical evidence about the temporal precedence between foreign direct investment (FDI) and economic growth in open developing economies is mixed. In this research effort, we explored the FDI-growth nexus for sixteen developing countries of Latin America and the Caribbean countries during the last three decades, a period in which many of these countries introduced various economic and financial reforms. In this analysis, we use the Granger non-causality test procedure recently developed by Toda and Yamamoto (1995), and Dolado and Lutkepohl (1996) –TYDL. Our results suggest that the null hypothesis that ‘FDI does not Granger causes economic growth’ is rejected for all countries except Dominican Republic, Trinidad and Tobago, and Jamaica. There is also evidence of unidirectional causality from growth to FDI for all countries except Bolivia, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, and Jamaica. We found bidirectional causality for Argentina, Brazil, Mexico, Peru and Venezuela.