Foreign Direct Investment and Sustainable Development: The Mediating Role of Government Size
Research Paper | Published: 30 June 2026
Volume 1 | Issue: 1
Author: Neslihan Kızıler Yılmaz
Abstract
For developing countries facing a lack of ideas and capital, foreign direct investment (FDI) constitutes a crucial resource. Since the 2000s, FDI flows from developed to developing economies have accelerated, with uppermiddle-income countries receiving the largest share of these investment inflows. This study aims to investigate whether upper-middle-income countries benefit from foreign direct investment (FDI) in terms of sustainable development, and whether the size of the government sector plays a role in shaping these benefits. The study employs a combination of fixed effect panel regression with Driscoll-Kraay standard errors, and MM-Quantile regression with robust standard errors. The findings in the study indicate that FDI flows generally tend to have a negative effect on per capita income and sustainable development. However, the size of the government may be an effective factor in mitigating this negative effect. Government investments play a crucial mediating role in enabling a more effective utilization of FDI for sustainable development. Considering these findings, this study suggests that while foreign direct investment can contribute to the achievement of Sustainable Development Goal 8, the conditions under which these benefits materialize can largely be established through public investment.