FDI, Foreign Aid, Remittance and Economic Growth in Developing Countries Uwaoma G. Nwaogu and Michael J. Ryan* Abstract Using a dynamic spatial framework, this paper investigates how foreign direct investment (FDI), foreign aid and remittances impact the economic growth of 53 African and 34 Latin American and Caribbean countries. Previous growth studies examine how one factor or two of these factors impacts economic growth, which results in biased estimation because of the omitted variable(s). Separate estimation shows foreign aid and FDI affects economic growth in Africa, but when we control for all three factors, only FDI affects African economic growth. For Latin America and the Caribbean, foreign aid and remittances affect growth when estimated separately, while remittances affect growth when they are estimated simulta- neously. Finally, both regions’ results confirm spatial interdependence is important in explaining economic growth, as growth in one country depends on the growth of its neighboring countries. 1. Introduction This study empirically examines the effects of foreign direct investment (FDI), foreign aid and remittances on the economic growth of 53 African and 34 Latin America and the Caribbean countries. Within the growth literature, these three factors are recognized as the major source of external finance and foreign exchange earnings. In 2009 for instance, remittances amounted to 1.9% of gross domestic product (GDP) for all developing countries and were estimated to be roughly US$325 billion in 2010 (World Bank, 2010). FDI flows to developing countries rose by 10% to US$525 billion in 2010 (UNCTAD, 2011) while aid flows from DAC (Development Assistance Committee) donor countries reached record high levels, amounting to US$129 billion in 2010 (OECD, 2010). The magnitude of these flows explains the numerous studies examining whether these factors affect economic growth and development. Several empirical studies (e.g. Chenery and Strout, 1966; Burnside and Dollar, 2000; Lumbila, 2005; Pradhan et al., 2008) 1 find evidence that these factors have a positive growth impact, while others (e.g. Griffin and Mckinley, 1994; Chami et al., 2005; Mah, 2010) 2 suggest a negative effect or no effect at all on economic growth. With respect to FDI, these results often depend upon whether the inward FDI provided access to foreign advanced technol- ogies as well as know-how and skills, or as suggested by Lyroudi et al. (2004), the capital required for FDI is raised in the host country rather than in the home country resulting in a redistribution of capital from labor intensive countries to capital inten- sive countries. * Nwaogu: Economics, Accounting and Management, Central College, 812 University St., Pella, IA 50219, USA. Tel: +1-641-628-5258; Fax: +1-641-628-5316; E-mail: nwaogug@central.edu. Ryan: Western Michigan University, 1903 W. Michigan Ave., Kalamazoo, MI 49008, USA. We would like to thank Paul Elhorst for his helpful comments and suggestions on the MATLAB coding. We also thank an anonymous referee for their comments, which improved the study. Review of Development Economics, 19(1), 100–115, 2015 DOI:10.1111/rode.12130 © 2015 John Wiley & Sons Ltd