KIEP Working Paper
This study examines the long-run and the short-run relationships between foreign direct investment and economic growth in Ireland. Using an augmented aggregate production function growth model, we applied the bounds testing approach to cointegration, which is more appropriate for estimating small sample studies. The data span for the study is from 1975 to 2006. The results indicate that foreign capital (FDI), domestic capital, and trade are statistically significant in both the long-run and the short-run, having positive effects on economic growth in Ireland. The causality analysis also suggests that there is a bi-directional Granger causality between GDP and FDI, and thus, we conclude that the FDI-led growth hypothesis is valid for the Irish economy.