This research aims to analyze empirically the causal relations among economic growth, exports, and foreign direct investment in Least Developed Countries (LDCs), by making use of annual data for the period between 1990 and 2009. The objective of this study is to test for the 'export-led growth' hypothesis for the LDCs, and to examine the FDI-growth nexus. In addition to the export-growth and FDI-growth nexuses, this study also allows us to examine a less-studied, but equally important relationship: the FDI-exports nexus.
Although there exist a voluminous empirical literature on both exports-growth and FDI-growth relations, there is no established consensus in the literature on these issues. Furthermore, most of the empirical literature focused on larger, middle income developing countries. Studies on lower income developing countries, including the group of Least Developed Countries are more than rare. This study aims to fill this gap in the literature. My exclusive focus on the case of Least Developed Countries also provides us a valuable opportunity to evaluate the main arguments and policy measures of development assistance programs such as the Brussels Plan of Action (BPoA). Typically, these international programs attribute a central role to export revenues and foreign direct investment inflows in economic growth and development of LDCs.
The variables under study are total exports of goods and services (Exports), inward foreign direct investment (FDI), and domestic income (GDP) in LDCs. In order to test causal relationships among the variables at hand, I estimate a trivariate panel vector autoregressive (VAR) model, through the Generalized Method of Moments (GMM) and other methods. This methodology allows me test both for pair-wise (bivariate), and multivariate causal relationships among the variables, in the Granger sense.
This study finds evidence for a multiplicity of causal relationships among the variables at hand. Broadly speaking, FDI inflows and Exports to the rest of the world together Granger-cause economic growth in LDCs, while economic growth and FDI inflows together Granger-cause exports. Tests also imply causality direction from exports to economic growth. I have also identified that a reverse causal relation does also exist, i.e. a higher rate of growth in national income seems to generate a higher level of exports in LDCs. However, my findings towards the FDI-exports nexus are rather faint. I fail to identify Granger-sense causality neither from the economic growth, nor exports towards FDI. This finding might reflect the fact that FDI inflows in the LDCs are not oriented towards serving the domestic demand but the international markets. When this finding is considered in the light of the recent empirical literature on FDI flows towards the LDCs, it can be inferred that FDI inflows to this group of countries are determined with completely different motives.