Impact of Foreign Direct Investment on Economic Growth: A Comparative Empirical Analysis of BRICS Countries

Abstract

The increasing globalization of economies has led to a significant rise in cross-border capital flows, with Foreign Direct Investment (FDI) emerging as a crucial driver of economic growth. FDI not only provides financial resources but also facilitates technology transfer, enhances human capital development, and integrates host countries into global value chains. Developing economies, in particular, seek FDI to bridge investment gaps, boost industrialization, and stimulate economic modernization. The present study investigates the dynamic relationship between FDI inflows, economic growth, and key macroeconomic determinants in the BRICS nations: Brazil, Russia, India, China, and South Africa, over the period 1991 to 2020. The BRICS economies represent some of the world’s most dynamic emerging markets, collectively contributing significantly to global GDP and trade. The primary objectives are to examine the impact of FDI on economic growth, identify and evaluate the factors influencing FDI inflows, and analyse the short- and long-term coupling effects between FDI and economic growth. The research aims to fill a significant gap in the literature by focusing on this crucial group of emerging economies, given their economic importance in the world economy in the coming decades. Using an extensive dataset sourced from World Bank Indicators, OECD Statistics, and the Penn World Table (Version 10.0), the study employs Method of Moments Quantile Regression (MMQR) and Wavelet Coherence (WTC) analysis to uncover nuanced insights. The study explicitly accounts for the heterogeneity among BRICS nations by employing the Method of Moments Quantile Regression (MMQR) with fixed effects, a technique recently introduced by Machado and Silva (2019) that effectively addresses cross-sectional dependence and unobserved heterogeneity. It further incorporates wavelet coherence analysis, an innovative approach in the field of economics, to explore short-term and long-term dynamics between FDI inflows and its determinants by mapping the patterns of temporal intersections of their relationship. The results of cointegration highlight that there is a long-term relationship between FDI inflows and economic growth in BRICS economies. The MMQR results further reveal that GDP, Trade Openness (TO), Institutional Quality (INSQ), and Information and Communication Technology (ICT) positively and significantly influence FDI inflows, underscoring their importance as critical drivers. Conversely, Exchange Rate (EXR) volatility and Total Factor Productivity (TFP) exhibit a negative impact, indicating the necessity of stable exchange rate regimes and efficient resource utilization for attracting foreign investment. Wavelet Coherence v analysis further highlights the dynamic, time-frequency relationships between FDI and its determinants, revealing short-term coherence (4-8 years) is most pronounced across variables, particularly for GDP, TFP, TO, and ICT, indicating strong immediate interactions with FDI inflows. Medium-term coherence (8-16 years) shows varied relationships, with trade openness and institutional quality displaying intermittent associations. Long-term coherence (16-32 years) is generally weaker across variables, though GDP and TFP exhibit slightly more stable long-term impacts compared to exchange rate, human capital, institutional quality, trade openness, and ICT. This suggests that these factors’ influence is more pronounced in the short run. The findings emphasize the need for BRICS nations to sustain economic growth through structural reforms, enhance trade openness, improve institutional quality, stabilize exchange rates, and invest in ICT and human capital to foster sustainable FDI inflows. Policymakers should adopt measures to stabilize currency fluctuations and provide a conducive investment climate for foreign investors. Although this study focuses on the original BRICS nations, future research could expand the scope to include the recently added BRICS members, examine sector-specific FDI inflows, and explore industry-level dynamics to provide more targeted policy recommendations.