Fdi and Economic Growth: Mauritius

FDI AND ECONOMIC GROWTH: MAURITIUS

Subject Area: Education / Adult Learning / Economatric

Modified: 28th August 2025

This study analyzes the impact of Foreign Direct Investment (FDI) on economic growth in Mauritius using a quantitative methodology with secondary data from 1990 to 2017. The data, sourced from the World Bank’s World Development Indicators (WDI) and the International Country Risk Guide (ICRG), includes variables such as real per capita GDP growth, inflation (GDP deflator), institutional quality (expropriation risk, corruption, rule of law), trade openness (exports + imports/GDP), human capital (average years of secondary schooling), and government spending (central government expenditure/GDP). The analysis uses STATA 12.0 software, applying descriptive statistics, correlation analysis, and ordinary least squares (OLS) regression.

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Table Of Content

Referencing Tools

S. No

1 Descriptive Statistics

2 Correlation between GDP Per capita

3 Direct aggregate effect of the level of FDI inflows on economic growth

6

4 Growth and FDI in the Primary Industry

7 Table 1: Descriptive Statistics

Variable	Obs	Mean	SD	Min	Max
GDPcapgr	28	3.92	1.73	0.64	8.03
DINV	28	26.62	3.39	20.73	33.11
Inflation	28	5.03	2.95	-0.65	10.78
Openness	28	119.25	10.06	97.13	137.11
Schooling	28	7.00	0.00	7.00	7.00
Govtspend	28	14.05	0.69	12.44	15.44
Prcred	28	68.66	22.88	33.06	106.31
FDI	28	1.91	1.66	-0.61	5.80
FDIPRI	12	1776.25	1579.10	199.00	6100.00
FDIMAN	27	295.48	376.56	3.00	1597.00
FDISER	21	325.00	428.05	3.00	1536.00
INSTQUAL	19	0.73	0.10	0.42	0.86

Table 1 presents the following averages: GDP growth (3.92%), domestic private investment (26.62%), initial GDP (6460.03 USD), inflation (5.03%), trade openness (119.25), human capital (7 years), government spending (14.05%), private credit (33.06–106.31), and FDI inflows (1.91%). Ranges for these variables vary as shown.

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Table 2: Correlation between GDP Per capita, Foreign Direct investment (% of GDP), FDI in primary, manufacturing and Service sectors Variables logGDPCAP logFDI logFDIPRI logFDIMAN logFDISER

Variables		logGDPCAP	logFDI	logFDIPRI	logFDIMAN	logFDISER
logGDPCAP		1
logFDI	r-value	0.3542	1
	p-value	0.0644
logFDIPRI	r-value	0.2270	0.6997	1
	p-value	0.2454	0.000**
logFDIMAN	r-value	0.0106	0.4191	0.5518	1
	p-value	0.9571	0.0264*	0.0023**
logFDISER	r-value	-0.3015	-0.6224	-0.6705	-0.3066	1
	p-value	0.1189	0.0004**	0.0001**	0.1125

**p<0.01

Table 2 shows that FDI in the primary sector has a strong positive correlation with total FDI (r=0.700, p<0.001). FDI in manufacturing is positively correlated with both total FDI and FDI in the primary sector, while FDI in services has a negative correlation with both. There is no significant relationship between GDP per capita growth and FDI inflows or its sectors.

Hypothesis

H₁: The direct aggregate effect of the level of FDI inflows has a significant and positive effect on economic growth of Mauritius.

Table 3: Direct aggregate effect of the level of FDI inflows on economic growth

Dependent variable: GDP Per capita	Model 1	Model 2
Independent variables
FDI	0.333* (0.138)	0.410 (0.303)
DPI	2.022** (0.683)	3.888* (1.702)
Control variables
Inflation	–	-0.052 (0.222)
Govtspend	–	-1.263 (2.801)
Privatcredit	–	-0.424 (1.407)
Openness		-1.989 (2.180)
Schooling		–
Instquality		-0.563 (1.320)
Constant	-2.461* (0.978)	1.709 (7.093)
Observations	28	28
R²	0.352	0.573

Figures within the brackets denotes Standard error

The model for direct aggregate effect of the level of FDI inflows on economic growth are

GROWTH = β₀+ β₁FDIⁱ+β₂DPI^j +V_i

When Control variables are added,

GROWTH = β₀+ β₁FDIⁱ+β₂DPI^j +β₃INSTQ_i^j+ β₄OPENNESS_i^j + β₅PRIVCREDIT_i^j + β₆GOVTSPEND_i^j + β₇INFLATION_i^j +β₈SCHOOLING_i^j + V_i

Table 3 presents the regression analysis with GDP per capita as the dependent variable. In Model 1, both FDI (β=0.333, p=0.02) and DPI (β=2.022, p=0.007) significantly impact growth, with an R-square of 35.2%. In Model 2, after adding control variables, DPI remains significant (β=3.888, p=0.04), while FDI becomes insignificant (p>0.05), and R-square increases to 57.3%. The hypothesis testing shows that DPI consistently impacts growth, while FDI does not after controlling for other factors.

H₁: The direct aggregate effect of the level of FDI inflows has a significant and positive effect on economic growth of Mauritius is accepted.

H2: The sectoral composition of FDI inflows positively and significantly affects the economic growth of Mauritius.

Table 4: Growth and FDI in the Primary Industry

Dependent variable: GDP Per capita	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6	Model 7	Model 8
Independent variables
DPI	2.511** (0.717)	3.393* (1.686)	1.924* (0.758)	4.619* (1.889)	1.902** (0.712)	4.719 (2.384)	2.644** (0.774)	4.729 (2.549)
FDIPRI	0.063* (0.025)	0.083 (0.060)	–	–	–	–	0.087* (0.042)	0.102 (0.073)
FDIMAN	–	–	0.017 (0.059)	0.036 (0.139)	–	–	-0.083 (0.064)	-0.027 (0.149)
FDISER	–	–	–	–	-0.064 (0.036)	0.017 (0.010)	0.003 (0.049)	0.065 (0.105)
Control variables
Inflation	–	-0.070 (0.214)	–	-0.197 (0.211)	–	-0.232 (0.312)	–	-0.189 (0.319)
Govtspend	–	-0.618 (3.019)	–	-2.742 (2.880)	–	-3.401 (3.495)	–	-1.757 (3.708)
Privatcredit	–	-1.432 (1.733)	–	-0.235 (1.872)	–	0.079 (1.467)	–	-1.499 (2.073)
Openness	–	-2.236 (2.199)	–	-1.733 (2.354)	–	-1.715 (2.370)	–	-2.559 (2.453)
Schooling	–	–	–	–	–	–	–	–
Instquality	–	-0.088 (1.377)	–	-0.506 (1.543)	–	-0.587 (1.494)	–	0.217 (1.697)
Constant	-3.112** (1.032)	3.013 (7.134)	-2.228* (1.097)	1.665 (7.638)	-2.065* (1.015)	1.788 (7.689)	-3.165** (1.140)	3.794 (7.802)
Observations	28	19	28	19	28	19	28	19
R²	0.364	0.576	0.205	0.505	0.293	0.503	0.407	0.595

FDI inflow data include foreign investment in all sectors of the economy (primary, manufacturing, services).

The estimation of FDI inflows in each sector are,

Primary sector

GROWTH = β₀+ β₁+INITIAL GDP_i+β₂HC_i+β₃INSTQ_i^j+ β₄TRADE_i^j + β₅FDI_i^j + β₆FDIPRI_i^j +V_i

When Control variables are added,

GROWTH = β₀+ β₁+INITIAL GDP_i+β₂HC_i+β₃INSTQ_i^j+ β₄TRADE_i^j + β₅FDI_i^j + β₆FDIPRI_i^j +

β₇INFDEF_i^j + β₈GOVTSPEND_i^j + β₉PRCRED_i^j + V_i

Manufacturing Sector

GROWTH = β₀+ β₁+INITIAL GDP_i+β₂HC_i+β₃INSTQ_i^j+ β₄TRADE_i^j + β₅FDI_i^j + β₆FDIMAN_i^j +V_i

When Control variables are added,

GROWTH = β₀+ β₁+INITIAL GDP_i+β₂HC_i+β₃INSTQ_i^j+ β₄TRADE_i^j + β₅FDI_i^j + β₆FDIMAN_i^j+ β₇INFDEF_i^j + β₈GOVTSPEND_i^j + β₉PRCRED_i^j + V_i

Service Sector

GROWTH = β₀+ β₁+INITIAL GDP_i+β₂HC_i+β₃INSTQ_i^j+ β₄TRADE_i^j + β₅FDI_i^j + β₆FDISER_i^j +V_i

When Control variables are added,

GROWTH = β₀+ β₁+INITIAL GDP_i+β₂HC_i+β₃INSTQ_i^j+ β₄TRADE_i^j + β₅FDI_i^j + β₆FDISER_i^j+ β₇INFDEF_i^j + β₈GOVTSPEND_i^j + β₉PRCRED_i^j + V_i

Primary sector, Manufacturing Sector and Service Sector

GROWTH = β₀+ β₁+INITIAL GDP_i+β₂HC_i+β₃INSTQ_i^j+ β₄TRADE_i^j + β₅FDI_i^j + β₆FDIPRI_i^j+ β₇FDIMAN_i^j + β₈FDISER_i^j +V_i

When Control variables are added,

GROWTH = β₀+ β₁+INITIAL GDP_i+β₂HC_i+β₃INSTQ_i^j+ β₄TRADE_i^j + β₅FDI_i^j + β₆FDIPRI_i^j + β₇FDIMAN_i^j + β₈FDISER_i^j+ β₉INFDEF_i^j + β₁₀GOVTSPEND_i^j + β₁₁PRCRED_i^j + V_i

Table 4 presents the regression analysis with GDP per capita as the dependent variable. In Model 1, DPI and FDIPRI are significant (β=2.511, p<0.001 and β=0.063, p<0.05). In Model 2, FDIPRI becomes insignificant after adding control variables. In Model 3, DPI is significant (β=3.393, p<0.05), while FDIMAN is not. In Model 5, DPI is significant (β=1.902, p<0.001), but FDISER is not. In Model 7, both DPI (β=2.644, p<0.001) and FDIPRI (β=0.087, p<0.05) are significant. Overall, DPI shows consistent significance, while sector-specific FDIs are mostly insignificant.

H₂: The sectoral composition of the FDI inflows has a significant and positive effect on economic growth of Mauritius is partially accepted.

Summary:

The study finds that the aggregate effect of FDI on economic growth in Mauritius shows a positive relationship with initial GDP per capita and FDI, while institutional quality and trade openness have negative but insignificant effects. When examining sectoral composition, FDI in primary sectors positively impacts growth, while institutional quality, trade openness, and service sectors show negative relationships. Overall, all variables, including FDI, institutional quality, and sector-specific factors, have insignificant impacts on economic growth (p>0.05).