Juma, Mary-Ann--Thesis

precise channel through which FDI affects growth or compare the effect of FDI to other
types of capital inflows, I focus on the additional question of whether the impact of FDI
varies between economies which are mineral-rich versus those which are not. I also
modify my data to account for business cycle effects by averaging over three- and five-
year intervals, which neither study does.
3.3 Endogeneity
Thus far, I have not mentioned the problem posed by possible simultaneity
between FDI and growth in the literature. This is important because there is a lack of
consensus on the direction of causality between FDI and economic growth. The argument
for causation flowing from growth to FDI inflows posits that countries experiencing
higher levels of growth also present higher returns to investment and more profit
opportunities for firms. All things being equal, investors move resources into such
economies in order to reap these more attractive returns, implying that faster economic
growth attracts higher FDI. In response to this problem, Choe (2003) tries to estimate the
direction of causality between economic growth and FDI by using a series of Granger
causality tests. Using a sample of eighty countries in the period from 1972 to 1995, this
study finds that FDI and economic growth Granger-cause each other, with slightly more
evidence for causation flowing from economic growth to FDI than vice versa.
The study does not test the for causality of different specifications of the data (for
example, by separating developing countries from developed countries, or rapidly
growing countries from their slower growing counterparts), which might have yielded
even more interesting results. In any case, the results indicate that it is still valid to
consider the relationship between FDI and growth, but that it is crucial to be aware of
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