This paper investigates whether aggregate Foreign Direct Investment (FDI), cross-border Mergers and Acquisitions (M&A) and greenfield investments affect economic growth, based on a panel data of 53 countries over the period 1996-2006. Both causality tests and single growth equations are applied to examine this relationship. The evidence suggests that there is bidirectional causality between FDI, M&A and growth. It also suggests that economic growth Granger causes greenfields, but the reverse is not true. The estimation of the growth equation leads us to conclude that FDI through greenfield investments exerts a positive impact on economic growth in both developed and developing countries. Conversely, M&A have a negative effect on the economic growth of developing countries, but insignificant on developed countries.

In recent literature, much attention has been devoted to the impact of Foreign Direct Investment (FDI) on economic growth in host countries, especially in developing countries. This debate assumes special importance in view of the recent changes in the composition and direction of FDI and the liberalization policies towards FDI in those countries. Theoretically, the foundation for empirical studies on FDI and growth derives from either neoclassical models of growth or endogenous growth models. FDI in neoclassical growth models promotes economic growth by increasing the volume of investment and/or its efficiency. The new endogenous growth models assume that FDI raises economic growth through technology transfer, diffusion and spillover effects.

The impact of FDI on growth is expected to be twofold. First, through capital accumulation in the host economy, FDI is expected to be growth enhancing by encouraging the incorporation of new inputs and technologies in the production process. Second, through knowledge transfers, FDI is expected to augment the existing stock of knowledge in the recipient economy through labor training, skill acquisition and through the introduction of alternative management practices and organizational arrangements (Balasubramanyam et al., 1996; and De Mello, 1999).

Unfortunately, there is conflicting evidence in the empirical literature regarding the impact of FDI on economic growth. While some studies observe a positive influence of FDI on economic growth, others detect an insignificant or negative relationship. This controversy has arisen partially due to data insufficiency in both time and cross-section studies. One possible solution for these kinds of problems regarding the analysis of FDI and growth is the use of panel data models (Bende-Nabende and Ford, 1998; De Mello, 1999; Soto, 2000; Nair-Reichert and Weinhold, 2001; Buckley et al., 2002; Bende-Nabende et al., 2003; Li and Liu, 2005; and Yang, 2007) to correct for continuously evolving country-specific differences in technology, production, and socioeconomic factors, thus eliminating many of the difficulties encountered in cross-country estimations. This allows the researchers to control country-specific effects and include dynamic, lagged dependent variables which can help to control omitted variables and endogeneity bias, respectively.

Business Strategy Journal, Foreign Direct Investment, FDIs, Cross-Border Mergers and Acquisitions, Economic Growth, Liberalization Policies, Skill Acquisition, Greenfield Investments, Domestic Investments, Manufacturing Sectors, Economic Development, World Development Indicators Online, Gross Domestic Product, Granger Causality Technique.