How does the sectoral composition of FDI induce economic growth in developing countries? The key role of business regulations

The prior empirical outcomes on the FDI-growth relationship are vastly conflicting. The key possible reason for these conflicting findings is the use of aggregate FDI, while FDI impacts largely depend on the receiving sectors of the host country. This study empirically estimated the influence of sectoral FDI on the economic growth and the role of business regulations in influencing the FDI-growth connection of 85 developing countries, for the time 1996-2019 and applied 2SLS method. The outcomes indicate the significant contribution of sectoral FDI inflows to economic growth. In contrast, the interaction of regulations with sectoral FDI negatively impacted host countries' economic growth. Furthermore, in low income countries, only agriculture and industry FDI have growth promoting effect, while manufacturing and services FDI are insignificant. Similarly, FDI inflows to all sectors positively affect middle income countries' economic growth except services FDI. However, FDI inflows to all sectors enhance high income countries economic growth. The regulations' interaction with all types of FDI adversely affects the economic growth across all income groups, except agriculture and services FDI in the case of low and high income countries, which are found insignificant. The outcomes are consistent by employing diverse econometric techniques and model specifications.

Automated summary

The study reveals that sectoral foreign direct investment (FDI) significantly contributes to economic growth in developing countries, while the interaction of business regulations with FDI negatively affects economic growth. The impact of different industries' FDI on economic growth varies across countries with different income levels, and only agriculture and services FDI have no significant impact on economic growth in low and high-income countries.