Foreign Direct Investments and Economic Growth in Saudi Arabia: A Cointegration Analysis

Abstract

This study used the Johansen cointegration framework to evaluate the causal relationship between foreign direct investment (FDI) and economic growth in Saudi Arabia during 1970-2012. By referring to endogenous growth theory and integrating an analysis of two additional variables of domestic capital investment and trade openness, the results show that there is at minimum a long-run relationship between FDI inflows, economic growth, domestic capital investment and trade openness. Moreover, Granger causality tests showed that FDI inflows promote both short- and long-term economic growth. As such, FDI has factored into improvements in the Saudi Arabia economic situation mainly since 2000. This result supports the FDI-led growth hypothesis of endogenous growth theory.

Keywords: FDI inflows, economic growth, domestic capital investment, trade openness, Johansen cointegration approach, Saudi Arabia.