Literature Review E. Borensztein et al., op. cit.; L. De Mello, Jr., op. cit.; and K.

Zhang, FDI and economic growth: evidence from 10 east Asian economies, Abstract This study represents an attempt to address the causal-order between inward FDI and economic growth using a panel data set for two different Economic Associations that is EU (European Union) and ASEAN (Association of South Eastern Asian Nations) over the period 1970-2003

The inflows of FDI to developed host countries raise the question of how these inflows affect their economies and what is the interaction between FDI and growth. While there is considerable evidence on the link between FDI and Economic Growth , the causality between them has not been investigated in a reasonable procedure.
Three possible cases are investigated in this paper 1) Growth-driven FDI, is the case when the growth of the host country attracts FDI 2) FDI-led growth , is the case when the FDI improves the rate of growth of the host country and 3) the two way causal link between them.

Empirical results obtained from heterogeneous panel analysis indicate the following Regarding the EU countries the results support the hypothesis of GDP -FDI causality (growth driven FDI) in the panel Regarding the ASEAN there is evidence that there is a two ways causality between GDP per capita and FDI in the cases of Indonesia and Thailand while in the cases of Singapore and the Philippines FDI is host country GDP growth motivated.

Find cumulative growth of FDI

Principal determinants of FDI

There is widespread agreement on what determines the flow of FDI to one country rather than another. Countries attracting large amounts of FDI generally have good economic fundamentals, that is, they have achieved a high degree of macroeconomic and political stability and have favourable growth prospects.490 They also tend to possess a good infrastructure and legal system (including enforcement of laws), a skilled labour force, and a foreign sector that has been liberalized to some extent (membership in free trade areas is a particular attraction). Location, country (market) size and natural endowments are generally important as well. In the former centrally planned economies, the degree of progress made in moving from plan to market has been a key explanation of FDI inflows (tables 5.2.1 and 5.2.2, charts 5.2.1 and 5.2.2 and appendix table B.17).491 More generally, those transition economies that have attracted substantial amounts of FDI have followed policies that have created friendly investment environments (although they often possess certain natural advantages as well). This section will first discuss some of the determinants of FDI flows into the first group of transition economies chosen as candidates for EU accession (Czech Republic, Hungary, Poland, Slovenia and Estonia). These countries have received the bulk of FDI in the transition economies during the past decade, never less than 60 per cent of the total annual inflow. The focus then switches to countries that have failed to attract much FDI. In some cases, they have been in a favourable position to do so, but domestic political and/or economic policies have discouraged investment. In others, the causes appear to be more fundamental and intractable. The first wave of EU candidate countries were among the first to achieve macroeconomic stabilization and their economic reforms have been the most advanced of all the transition economies. Although there have been considerable policy differences between them, a key element of the reforms has been the privatization of state assets with the involvement of foreign strategic investors. These acquisitions, the timing of which has been determined by the political process and national timetables for the sale of specific assets, have accounted for a considerable share of total FDI. Exclusive of Slovenia (see below), the early investment promotion efforts of these countries not only signalled that foreign

investment was welcome in the former state run economies, but they also capitalized on the enthusiasm of western investors. At various times, investment incentives have been introduced492 which still seem to retain their attractiveness for individual countries competing for FDI