Effect of FDI on economic growth of least developing countries - Evidence from Bhutan

Abstract

The aim of this paper is to investigate the causal relationship between Foreign Direct Investment (FDI) and economic development in Bhutan. To achieve the objective of the study, we employ the FDI data in the context of Bhutan from the year 2002 to 2017 (15 years). Johansen's Co-integration test has been employed to test if there exists bidirectional causality between FDI and economic growth. Unit root test is used to check if the time series data is stationary. Further, Vector error correction model is used to investigate the causal relationship between FDI and economic growth in the context of Bhutan. The results indicated that there is a long run association between Gross Domestic Product and Foreign Direct Investment in the context of Bhutan as displayed by Johansen's Cointegration Test. Vector Error Correction Model results document that there exist neither short run nor long run causality running from FDI to Gross Domestic Product (GDP) in the context of Bhutan. Due to nonavailability of FDI inflow data before 2002 in the context of Bhutan, the study focuses on the period from 2002 onwards till 2017. The relationship between FDI and economic growth has been the most researched area in literature. This relationship has been studied in the context of single country as well as group of countries. There have been studies carried out in this area in the context of South Asian Association for Regional Cooperation (SAARC) Nations, excluding Bhutan. Therefore, through this study, we make an attempt to fill the research gap existing in the literature. The findings of this study are validated with the results of the relationship between FDI inflows and economic growth of least developed nations.