Effects of foreign direct investment on economic growth and modernization in developing countries: A time series and cross-national analysis

The main objective of this study is to explore the effects of foreign direct investment (FDI) on economic growth and social modernization of the developing countries, and to examine how economic and social factors guide foreign direct investment. The study is separated into two parts. The first is an investigation of FDI effects on economic growth and in economic variables on FDI. In the second, we test for the effects of FDI on socio-economic development, and then turn to examine the effect of social factors on FDI.; The first part of this study utilized a fixed effects model to capture the effects of country and time dummies. Seventy three countries were used in the data set over a seventeen-year period 1971-1987. These countries were categorized into different income levels (high, middle and low), according to World Bank definition. Only thirty middle income countries were used for the second part of this investigation. Factor analysis was conducted to construct three socio-economic dimensions: a social modernization factor, a labor factor, and an urban differential factor. Maximum likelihood method and varimax rotation were used in the factor analysis.; The principal findings of this dissertation are: (1) growth rate of FDI negatively effects the GDP growth rate, and then only for middle income countries; (2) the growth rate of gross domestic investment has a positive effect on the FDI growth rate for middle income countries; (3) increasing FDI shares will increase the GDP growth rate for high and middle income countries; (4) a greater import share induces more FDI; (5) FDI has positive effects on social modernization, employment, and urban-rural differentials in the middle income countries; (6) low-wage labor and urbanization are attractive to FDI.