An Empirical Study of the Influence of Foreign Direct Investment on Economic Development and Financial Growth

Posted: May 29, 2015

• Sarah Carter
• Sarah Flores
• Sarah Wilson

Abstract

The relationship between foreign direct investment and economic development represents one of the most extensively studied topics in development economics and international finance. Traditional approaches to understanding this relationship have predominantly relied on linear regression models and aggregate macroeconomic data, often yielding contradictory findings across different contexts. While some studies demonstrate strong positive correlations between FDI inflows and economic growth, others reveal negligible or even negative effects, particularly in developing economies with weak institutional frameworks. This empirical ambiguity underscores the need for more sophisticated analytical approaches that can capture the complex, non-linear nature of FDI impacts across diverse economic environments. Our research addresses this gap by introducing a novel computational framework that integrates machine learning techniques with causal inference methods to examine the multifaceted relationship between FDI and economic development. We move beyond conventional econometric approaches by incorporating high-dimensional data, accounting for heterogeneous treatment effects, and identifying the specific conditions under which FDI generates positive developmental outcomes. This methodological innovation allows us to address fundamental questions that have remained unresolved in the existing literature, including the precise mechanisms through which FDI influences economic growth, the role of mediating variables in this relationship, and the existence of optimal thresholds for FDI absorption capacity. This study makes several distinctive contributions to the literature. First, we develop a comprehensive theoretical framework that integrates insights from institutional economics, financial development theory, and technology diffusion models to explain the conditional nature of FDI impacts. Second, we employ an unprecedented dataset that combines traditional macroeconomic indicators with novel microeconomic variables derived from digital transaction data, satellite imagery, and corporate registry information.