The Volatility of FDI, not the Level, affects Growth in Developing Countries.
This paper contributes to the literature on FDI and economic growth. We deviate from previous studies by introducing measures of the volatility of FDI inflows. As introduced into the model, these are predicted to have a negative effect on growth. We estimate the standard model using cross-section, panel data and instrumental variable techniques for a sample of 67 developing countries. Whilst all results are not entirely robust, the consistent finding is that volatility of FDI has a negative effect on growth. The evidence for a positive effect of FDI is not robust, nor is that for any effect of human capital. For the developing countries in the sample, there is evidence of convergence and the principal factors retarding growth appear to be policy distortions and the volatility of FDI, interpreted as a proxy for factors causing economic instability.
University of Groningen: CDS Research Report No. 13. 37 pp.