The Relationship between Gross Domestic Product and Foreign Direct Investment: The Case of Cambodia

Abstract

Foreign Direct Investment (FDI) is widely believed to have positive effects on economic
growth; yet for Cambodia, over 19 years (1993-2011) of attracting FDI inflows, the growth
rate of Gross Domestic Product (GDP) has averaged at 7%, which demand a modest attempt to
study their relationship whether FDI drives growth of Cambodia’s economic output. This
paper aims to examine the relationship between foreign direct investment and gross domestic
product of Cambodia in long run over the period of 1993-2011 by using simple regression
analysis, Augmented Dickey-Fuller test, Durbin-Watson test, Breusch-Godfrey Serial
Correlation LM test, Breusch-Pagan-Godfrey test, and Jarque-Bera test. The result from
regression found that there is a positive relationship between FDI and GDP in the long run in
Cambodia, which is also supported by qualitative studies that is based on the collection of
existing studies from recognized domestic and international institutions, people in senior
positions, and researchers. All of the qualitative studies presented in this paper claim that FDI
positively affects GDP, and most significantly, to the employment opportunities generated for
local people, which in the long run help unemployment and poverty reduction in Cambodia.
However, GDP growth rate has averaged at 7% over 19 years although the influx of FDI
inflows dramatic increase probably because of the internal factors of Cambodia, particularly
the limited absorptive capability of the advanced technology.