Causality between foreign direct investment and economic growth for Cambodia

Abstract

The relationship between foreign direct investment (FDI) and economic growth in recipient economies remains one of the hottest debates. As confirmed in the literature, many studies support the growth impact of FDI, but some do not. Cambodia, a war-torn economy, also depends on FDI as a driver of economic growth. In addition, the causal relationship between FDI and growth in Cambodia is not fully known. Therefore, this paper is an attempt to examine the causal link between the two variables over the period 1980–2014, using Granger causality test based on the vector error correction model. The empirical results provide strong evidence on the causal impact of FDI on Cambodia’s economic growth (GDP). However, the study does not confirm causality to run from GDP to FDI. This can be concluded that the growth impact of FDI is sufficiently supported in Cambodia.