The Analysis of foreign direct investment on economic growth

Abstract

Foreign Direct Investment (FDI) is broadly recognized as the foundation of economic advancement especially within the context of least-developed countries (LDCs) like Myanmar. FDI not only brings capital but also opens doors for employment by catalyzing economic development. In response, Myanmar's policymakers have been strategically crafting and implementing reforms to maximize FDI inflows. Since transforming into a market-driven economy and enacting the Myanmar Foreign Investment Law (FIL) in the same year 1988, the Myanmar government has shown unwavering dedication to attracting FDI. The introduction of the new Myanmar Investment Law (MIL) in the year of 2016 further underscores this commitment. However, the recent upheavals as a consequence of the pandemic’s impact and political transformations have shown uncertainty among potential foreign investors. Therefore, it becomes critical to understand the connection between FDI and economic expansion to identify the policies to encourage FDI inflows. The main purpose of this paper is to investigate the economic upturn due to the effect of FDI by employing a time-series data analysis through the Vector Error Correction Model (VECM). This paper utilizes yearly figures over the period from 1989 to 2022 of GDP growth rate, investment inflow amount, trade amount and inflation rate scaled by GDP, and unemployment rate from reliable sources including the World Bank, the International Labor Organization, and the Directorate of Investment and Company Administration. The analysis indicates that increased FDI and a slight rise in inflation positively influence economic expansion in a developing country context like Myanmar. Furthermore, it demonstrates that lowering trade deficit and reducing unemployment rates significantly contribute to enhancing economic growth. Therefore, this ii study’s findings advocate the Myanmar government to strategically prioritize FDI promotion to achieve sustained economic advancement in the long term.