Impact of FDI on GDP: An Analysis of Global Economy on Production Function

This study examines the effects of Foreign Direct Investment Inflows on Gross Domestic Product on the production function theory by balanced panel data of World Development Indicators from 1992 to 2010 of 59 countries representing the global economy. The empirical analysis on basis of generalized least squares estimator with random effects suggests that there is a significant positive relationship between all the variables of Production Function including Gross Domestic Product and Foreign Direct Investment Inflows. The unit root test confirms the model’s predictive validity and all the three variables significantly explain variation in the Gross Domestic Product, Co-integration test confirms the long-run relationship and Granger causality test finally identifies the presence of unidirectional causality among Gross Domestic Product and Foreign Direct Investment Inflows and Bidirectional causality between the all variables of the original production function. It is recommended for the host nations to emphasize on pro-capital polices to attract and maximize foreign direct investment inflows which will ultimately increase Gross Domestic Product of the host nations.