FDI, Financial Development, and Growth in the Commonwealth of Independent States

This paper examines the effects of FDI (foreign direct investment) on the CIS (Commonwealth of Independent States) countries' output growth, utilizing recent panel cointegration testing and estimation techniques. Annual panel data on eleven CIS countries’ macroeconomic variables over the period 1960-2013 are employed in empirical analysis. Using various heterogeneous panel cointegration and panel causality tests, a bi-directional relationship between FDI and growth is found. We find evidence for both FDI-led growth and growth-induced FDI hypotheses for the CIS economies over the sample period. Among various explanatory variables, financial market development and trade openness show the most significant positive effects on GDP growth. The complementary effects between FDI, financial development, and trade openness in enhancing output growth are found to be robust to the inclusion of other control variables.