The The Impact of Fdi on Economic Growth in Emerging and Developing Economies: The Role of Institutional Quality and Technology Diffusion

Foreign direct investment (FDI) has long been considered as a key determinant of economic growth, particularly within emerging and developing economies. This study provides an empirical investigation into how institutional quality and technology diffusion influence the relationship between FDI and economic growth in 136 emerging and developing economies from 2000 to 2023. The central hypothesizes are that sound governance and technology diffusion, by lowering business costs and reducing uncertainty, can attract more FDI and ultimately foster economic growth. Implementing a robust panel dynamic estimation technique (GMM-system), the study uses the six indicators of institutional quality from the World Governance Indicators (WGI) and an additional overall composite index of governance. The findings confirm a positive and significant net effect of FDI on economic growth. In particular, the study identified that enhancements in rule of law and internet diffusion—as a proxy for the diffusion of technology—significantly strengthen FDI’s positive impact on economic growth in emerging and developing economies. The priority policy recommendations are for policymakers in these countries to implement policies that improve the overall governance climate—particularly the rule of law—and foster technology diffusion to enhance the growth benefits derived from FDI inflows.