Abstract
This article examines the effect of foreign direct, investment (FDI) on output and total factor productivity (TFP) growth, in the host, economy. FDI-led growth hypothesis is investigated for Denmark,, Finland, Norway, and Sweden by constructing a vector autoregression (VAR) model. On the basis of the new Granger non-causality procedure developed by Toda and Yamamoto (1995) and Yamada and Toda (1998), the results show that FDI and output, arc causally related in the long run for Norway and Sweden. Granger-causality is bi-directional in Sweden and unidirectional, running from FDI growth to economic growth, in Norway. Our findings could not offer support for the causality link for Finland and Denmark. The established bi-directional, causality between variables reveals two policy implications. First, by stimulating economic growth, the recipient countries can encourage inflows of FDI. Second, FDI exerts a major influence on economic growth.