Does Foreign Direct Investment Improve National Competitiveness? Dynamic Panel Evidence from Upper- and Lower-Middle-Income Countries

Irna Kumala; Heru Subiyantoro; Jooner Rambe

doi:10.55927/eajmr.v5i5.134

Authors

Irna Kumala Indraprasta PGRI University
Heru Subiyantoro Borobudur University
Jooner Rambe Borobudur University

DOI:

https://doi.org/10.55927/eajmr.v5i5.134

Keywords:

Foreign Direct Investment, National Competitiveness, Dynamic Panel, Arellano-Bond GMM

Abstract

This study examines whether FDI improves national competitiveness in upper-middle-income and lower-middle-income countries. Using panel data from 24 countries during 2007-2023, the study applies a dynamic panel approach using Arellano-Bond Generalized Method of Moments (GMM). The sample is divided into 11 upper-middle-income countries and 13 lower-middle-income countries. The results show that FDI has a positive and statistically significant effect on national competitiveness in upper-middle-income countries, while the effect in lower-middle-income countries is positive but weaker. The diagnostic tests indicate that the GMM models are acceptable based on instrument validity and the absence of second-order autocorrelation. These findings suggest that FDI contributes to competitiveness upgrading mainly when host economies have sufficient capacity to absorb and transform foreign investment into productivity, innovation, and institutional improvement. The study contributes to the literature by showing that the FDI-competitiveness relationship is dynamic and development-stage dependent.

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