Foreign direct investment in Egypt determinants, spillovers, and causality

Foreign direct investment (FDI) is being widely considered as an important vehicle for economic growth in least developed countries (LDCs). Egypt is a particularly interesting case to examine for a number of reasons. First, the recent increase in the inflow of FDI in Egypt, although important in itself, is still lower than what is expected. Second, the role of FDI in promoting output and the direction of causation is still unknown as little empirical research has been conducted in this field for Egypt. Most empirical studies of foreign direct investment (FDI) typically use either a cross- sectional or time series approach. The originality of the study is in the empirical investigation of these issues on the basis of a broad panel of sectoral data for Egypt. This thesis attempts to explore the determinants of MI at the sectoral level in the Egyptian economy by using a panel data of 10 sectors over the period from 1983 to 2004. The results highlight that private domestic investment, openness' to trade, and government policies towards reforming and improving business and investment climate are important determinants of sectoral FDI in Egypt. Second, it attempts to fill the empirical gap in the literature by re-examining the impact of FDI on productivity for a cross sectional sample of the Egyptian manufacturing sector from 1975 to 2005. The results reveal that foreign direct investment inflows exert a positive spillover effect on productivity. Finally, it aims to study the causal link between FDI and GDP by using a time series data from 1978 to 2009. The econometric framework of cointegration and error correction mechanism were used to capture two way linkages between FDI and GDP. It is evident that in the long run there is a bidirectional relation, while in the short run, causality runs from FDI to GDP.