Foreign Direct Investment and Economic Growth Dynamics

Foreign direct investment (FDI) has long been recognised as a key driver of economic development, supplying host economies with capital, advanced technologies and managerial expertise. The dynamic relationship between FDI and growth depends critically on a nation’s absorptive capacity, institutional framework and integration into international trade. Inflowing FDI can stimulate productivity spill-overs, foster innovation and support job creation, yet its effects vary across regions, sectors and stages of development. Policymakers therefore balance incentives for foreign investors with measures to bolster domestic enterprises, safeguard macroeconomic stability and promote sustainable, inclusive expansion.

Research from Nature Portfolio

Recent studies have explored how institutional quality shapes the developmental gains from FDI in sub-Saharan Africa. Analysis across multiple countries demonstrates that robust governance—particularly effective rule of law, regulatory transparency and control of corruption—enhances the productivity of foreign capital and encourages technology transfer. Conversely, weak institutions tend to underutilise local resources and limit domestic spill-overs. The findings underline the need for coordinated reforms to strengthen domestic investment alongside more effective regulatory frameworks to maximise the long-term growth benefits of FDI.

Foreign Direct Investment and Economic Growth Dynamics publication trend

The graph below shows the total number of articles in foreign direct investment and economic growth dynamics across all publications each year (not limited to Nature Index journals).

Technical terms

Foreign direct investment (FDI): Cross-border equity or capital flows with lasting interest and managerial influence in a host country’s enterprises.

Institutional quality: The strength and effectiveness of governance structures, including rule of law, regulatory transparency and control of corruption, that shape economic outcomes.

Panel vector autoregression (PVAR): A statistical technique modelling dynamic interdependencies among multiple time-series variables across panel data.

Autoregressive distributed lag (ARDL) model: An econometric framework estimating both short-run and long-run relationships among time-series variables within a single equation.

Political alignment: The tendency of states to synchronise diplomatic positions or votes in international organisations, often influenced by economic dependencies.

References

1. Institutional quality, foreign direct investment, and economic development in sub-Saharan Africa. Humanities and Social Sciences Communications (2020).
2. Panel data analysis of foreign direct investment, control of corruption, and economic growth: Evidence from ASEAN-6 countrie. International Journal of Data and Network Science (2024).
3. What Happens When Your Hand is in My Pocket: The Foreign Policy Effects of China’s Foreign Direct Investment in Africa. Journal of Business Ethics (2024).
4. Foreign direct investment and economic growth in developing countries: The role of international trade and foreign debt. Modern Finance (2024).