Global Outward Foreign Direct Investment and Economic Growth Across Income Groups: The Mediating Effect of Home Country Institutions

Abstract

Although some empirical studies have examined the direct impact of outward foreign direct investment (outward FDI) on economic growth, but the indirect role play by home country institutions in outward FDI-induced economic growth remain unexplored. To cover this research gap, this study examines the impact of outward FDI on economic growth mediated by home country institutions in global panel of 161 economies, divided into World Bank income clusters such as high, upper-middle, lower-middle, and low-income economies for the period 1998 to 2019. For empirical analysis, this study utilized the Cross-Sectionally Augmented ARDL (CS-ARDL) and the Common Correlated Effect Mean Group (CCEMG) techniques robust to numerous econometric problems. In low-income countries, results indicate that outward FDI internationalization activities have adverse effect on economic growth, and the impact of home country institutions in stimulating outward FDI-induced growth appears weak both in the short term and long-term. In the case of high income, upper-middle income and lower-middle income countries, finding highlights that the joint impact of outward FDI and home country institutions stimulate higher economic growth and accelerate economic integration into the global economy. These impacts were found to diminish moving from high to low-income countries, which suggests that home country institutional development and income economy level matters for outward FDI-induced growth effects. The study also discusses key implications for policy.