Foreign Direct Investment and Economic Growth in the European Union

Abstract

This paper investigates whether foreign direct investment enhances economic growth in Mauritius using time series data for the period 1975-2000. Domestic private investment and public investment are also utilized to estimate a neoclassical production function in the long run as well as in the short run. The long run results, based on the newly developed auto-regressive distributed lag (ARDL) bounds test approach to cointegration, indicate that foreign direct investment exerts a highly significant positive impact on economic growth in Mauritius. As for domestic investments, private investment shows positive and highly significant impact, whilst the effect of public investment is positive but only significant at the 10 percent level. The main policy recommendation of this paper is that Mauritius should continue to attract FDI and at the same time promote polices that would further encourage private investment.