The Impact of Foreign Direct Investment on Economic Growth in Central Asia: Evidence From Panel Data Analysis (1995–2023)

Azizjon Majlisov Zarif Ugli, Leni Permana, Inomjon N. Kudratov

Abstract


Foreign direct investment (FDI) has long been regarded as a key channel through which capital, technology and managerial know-how are transferred to transition economies. This study examines the impact of FDI on economic growth in five Central Asian countries — Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan — over the period 1995–2023. Using a balanced panel dataset compiled from the World Bank's World Development Indicators, UNCTAD and the IMF, the study applies second-generation panel econometric techniques. Cross-sectional dependence is tested using the Pesaran CD test, stationarity is examined with the CIPS unit root test, and the long-run equilibrium relationship is verified through the Westerlund cointegration test. Long-run coefficients are estimated using Fully Modified OLS (FMOLS) and Dynamic OLS (DOLS), while the two-step System GMM estimator is employed to address endogeneity. Finally, the Dumitrescu–Hurlin panel causality test is applied to determine the direction of causality. The results indicate that FDI exerts a positive but relatively modest effect on GDP per capita, whereas gross fixed capital formation, trade openness and human capital are stronger and more robust drivers of growth. Institutional quality is found to significantly moderate the FDI–growth relationship, implying that FDI contributes to growth only when the institutional environment surpasses a certain threshold. Causality runs bidirectionally between FDI and economic growth. The findings suggest that Central Asian policymakers should prioritise diversifying FDI away from extractive industries, strengthening institutional quality, and enhancing domestic absorptive capacity in order to maximise the growth benefits of foreign capital.


Keywords


Foreign Direct Investment; Economic Growth; Central Asia; Panel Cointegration; FMOLS; System GMM; Institutional Quality

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DOI: https://doi.org/10.17509/msb.v8i2.105353

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