Aim and Introduction

Inclusive growth strategy is a new concept in the field of growth and development in the economy, which is used by policymakers in a special way. In various political discourses, inclusive growth is a result of basic meanings such as large and fair growth, economic growth in alinmment with the development of human growth, pro-poor, accessible and participatory growth, sustainable growth from an economic and environmental perspective, and many private concepts. On the other hand, foreign direct investment (FDI) can be considered as a means of financing countries, which is one of the best tools for economic development.

Considering its contribution and long-term implication, it is a narrow approach to lemmatize the role of FDI in promoting economic growth only. The new developments in growth literature take poverty and inequality also in the account. Hence, the paper links FDI with a broader term, Inclusive Growth. Inclusive growth is a growth process that includes every segment of society. It creates and distributes opportunities in an equitable manner and utilizes a major part of the labour force. It also moves them out of poverty and enhances productive employment. The evidence from a long list of literature, consulted for this research suggest that the resulted effect of FDI on inclusive growth is highly defined by the host economy’s own institutional quality.

Methodology

In literature, inclusive growth is defined as the maximization of the social opportunity function. As it undertakes the spectrum of efficiency and equity under one umbrella. The concept of social opportunity function itself was derived from the idea of generalized concentration curve introduced initially by (Ali & Son, 2007) in inclusive growth literature. This concept of generalized concentration curve was later used to form social opportunity index by calculating the area under the curve (Anand, Mishra, and Peiris, 2013).

Considering the fact that opportunity can take any forms such as health care, education or several other monetary and non-monetary opportunities. The study will use income as a determinant of opportunity. As it is the most common and widely used measure of determining individuals’ access to certain other kinds of opportunities.

The aim of the present study is to analyze the effect of attracting foreign direct investment on inclusive growth in the Shanghai Cooperation members during the period of 2000-2022. Therefore, in order to calculate the inclusive growth index, to introduce the study model of this research and examine it the panel data method has been used. For estimating the model, threshold panel in Stata software has also been applied, to analyze the effect of foreign direct investment attraction on inclusive growth.

Results and Discussion

The results presented in this paper are fixed effect robust estimates, which automatically addresses any underlying existence of heteroscedasticity. Hausman specification test has been used to select between the two widely used panel estimation techniques, fixed and random effect estimation. Result for the overall sample of world economies shows a significant positive effect of FDI on inclusive growth and GDP. The estimation of the model was based on the fixed effects method in the stata software, and the results of the estimation of the model show that except for the exchange rate variable, the rest of the model variables have a significant effect on inclusive growth. The threshold limit for the foreign direct investment attraction variable is 4.875 billion dollars, based on which the Gini coefficient variable above and below this threshold limit will have different effects on inclusive growth. When the attraction of foreign direct investment is lower than this threshold, the Gini coefficient has a significant effect on the inclusive growth variable in the countries under study. In other words, with one unit increase in the Gini coefficient, it causes a decrease of 0.005 units in the inclusive growth index. This issue is in line with the view of dependency advocates.

The second key variable, institutional quality, has shown a significant effect on overall economic growth. The results show that a good and developed financial system may increase the available volume of financing investment. Supervision of investment projects that reduces the cost of obtaining information and increases productivity during projects and accelerates economic growth.

Conclusion

The purpose of the study was to investigate the proposition that, foreign direct investment can be used as a financing tool for growth inclusiveness. The study calculated and used the inclusive growth variable following the methodology of social welfare function which is also known as the social opportunity function.

The study reached to following conclusions:

Foreign direct investment can be used as a financing tool for inclusive growth. A deep underpinning of its impact on inclusive growth variable suggested that the impact of FDI on increasing the overall income is positive and significant. Yet it does not significantly influence the distribution of the opportunities. Hence, FDI does not influence inclusive growth through equity channel but by increasing the average opportunities.

The results of the research show that the Gini Coefficient Index, which is considered as a threshold change above and below the foreign investment attraction threshold, has a different effect on the overall growth index. When Foreign Direct Investment is less than the threshold, with a unit increase in the Gini Coefficient, leads to a worsening of the equitable distribution of income. As a result the index of inclusive growth, is in line with the views of the dependency theory. If Foreign Direct Investment is above the threshold, with one unit increase in the Gini Coefficient, which leads to a worsening of the equitable distribution of income, the index of inclusive growth increases, will be in line with the theory of modernization