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act on economic growth, secondly to analyse its effect on technology spillover.

Various studies and research have proved that the effect of FDI on economic growth in mostly positive and if left at this stage would produce results that are generic and have been previously studied. Therefore further discussion considering the spillover effect on FDI gives a clearer picture on how it affects economic growth in total.

The rest of the paper is organised hereafter as follows; in section 3, which is the literature review, theoretical evidence regarding the relationship between FDI and economic growth will be examined in addition to the spillover effect caused by FDI. This chapter also aims to review existing literature.

Section 4 focuses on a macro-economic model which will be used to explain the impact of FDI on economic growth. In this research, the augmented Solow-Swan model by Mankiw et al (1980) would be used.

Additionally, empirical analysis with data to back up literary content is carried out at a later part of the research (Section 5). The data used are collected from World Development Indicators, Global Market Information Database and International Historical statistics. A certain level of econometrics is vital and running regressions using Ordinary Least Square methods will be carried out.

Graphs will be used to view the trends of each variable but focused particularly on the Foreign Direct Investment variable, which is dependent on GDP. To round up, limitations and conclusions will be drawn on observation from data.

3. LITERATURE REVIEW

This part of the research will focus on the theoretical evidence as well as the empirical evidence (studies) regarding the postulated relationship between FDI and economic growth of which evidence maybe general or specific.

3.1. FDI and Economic Growth

The relationship between FDI and economic growth has been widely studied. Robert Solow and Trevor Swan in 1950 came about the augmented Solow growth model which started with the traditional neoclassical growth theory. In this model, he explains how output of an economy grows with respect to physical capital which includes labour and capital inputs. Economies under this model obey the laws of diminishing return to scale.

Athukorala and Chand (2000) and Balasubramanyam et al (1996) confirm that countries that have open trade policies and good trade regimes, tend to have a growth enhancing effect of export which makes FDI significant and strong.

Zhang (2001) explains that economies undergoing rapid growth not only create more room for FDI, but also make available better opportunities (income wise) for foreign investors and by so doing draw a greater dimension of FDI.

Alternatively, Zhang further explains how FDI inflows on host country can promote economic growth through direct effects and spillover effects. He concludes that both FDI and economic growth are positively mutually supporting and could lead to a two-way causality.

Yao and Wei (2007) argue that FDI affects economic growth positively in two ways; as a mover of production efficiency and a shifter of production frontier. Nevertheless, they regarded FDI as an important tool for economic growth especially in China. They also predicted that the less-developed regions of China, like the inland provinces might be able to cat