Foreign Direct Investment Inflows and Economic Growth: The Case of Korea

The current study examines the relationship between FDI inflows and economic growth of Korea and tests the Bhagwati hypothesis which says that FDI inflow is more beneficial to economic growth in an open trade regime in a multivariate framework. Unlike previous works on the concerned hypothesis, a small-sample cointegration test is applied to the time-series data. There is no evidence of cointegration among the variables. The Granger causality test results show that, although FDI inflows do not cause per capita real GDP, the latter is revealed to cause the former when the economic crisis dummy variable is included. There is a unidirectional short-run causality from domestic investment to per capita real GDP growth rate. The case of Korea does not support the Bhagwati hypothesis.