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rowth in a sample of 73 developing countries.

Maria Carkovic and Ross Levine (2002) concluded in their econometric study on FDI and GDP growth that the exogenous component of FDI does not exert a robust, independent influence on growth. However, no consensus has yet been reached on the steady state as well as dynamic effects of FDI on growth. Some studies argue that the impact of FDI on growth is highly heterogeneous across countries with relatively open economies showing statistically significant results, the other studies maintains that the direction of causality between the two variables depends on the recipient country’s trade regime. Economic reasoning supports many different forms of causality between FDI and GDP: causality from FDI to GDP, from GDP to FDI, permanent long-run movements, and transitory short-run adjustments. For open economies, causality between FDI and GDP appears to be bi-directional. But causality is bi-directional only in the short run for relatively closed economies. Long run causality for relatively closed economies is uni-directional and runs mainly from GDP to FDI.

Bhagwati (1973) has explored the importance of trade regime in benefiting the host countries in terms of economic growth and economic activity. Bhagwati, (1978), (1994); Brecher and Findlay, (1983); Brecher and Diaz-Alejandro (1977) countries gain more from FDI which follow the export promotion trade regime rather than those working under the protection of Import substitution policies. The connection between the benefits from inward FDI and the trade policy of the host country echoes an earlier suggestion by Bhagwati (1978). Balasubramanyam et al. (1996) emphasize trade openness as being crucial for acquiring the potential growth impact of FDI. He said that growth effects of FDI could be positive or negative, with negative effects associated with import-substitution policies. The results of the analysis carried out by Archanun Kohpaiboon on the impact of FDI on growth performance in investment receiving countries through a case study of Thailand for the period 1970-1999, shows that the growth impact of FDI tends to be greater under an export promotion trade regime compared to an import substitution regime.

Athukorala and Chand (2000) provide some evidence that the growth-enhancing effect of FDI would be significant and strong in countries with open trade policies and better trade regimes with export-promoting FDI. Balasubramanayam et al. (1996) found that in developing countries pursuing outward-oriented trade policies, FDI flows were associated with faster growth than in those developing countries that pursued inward oriented trade policies. These considerations suggest, that positive effects of FDI on a host economy might depend not only on local conditions and policies but also on the sector into which FDI occurs. Razin, Sadka and Yuen (1999) argue that foreign investors’ asymmetric information advantage might lead them to over-invest; Hausmann and Fernandez-Arias (2000) also cast doubts on the special merits of FDI. One of the main reasons to examine productivity spillovers from foreign-owned to domestically owned firms, as Lipsey (2002) mentions, is to understand the contribution of inward FDI to host country economic growth.

FDI can create economies of scale, infact a higher level of production can be achieved by means of the linkage effects. Further investigating the trends of FDI