When Does Foreign Direct Investment Lead to Inclusive Growth?

Hyojung Kang and Jorge Martinez-Vazquez ()
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Hyojung Kang: Economics Department and International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: Foreign Direct Investment (FDI) is widely considered among the most effective instruments for the promotion of economic development. However, not all FDI leads to inclusive economic growth, lifting the welfare of the poorest groups in developing countries. This paper examines the conditions under which FDI can effectively lead to inclusive growth. By using a fixed effects regression with annual data for 68 countries from 1990 to 2015, we find that FDI has the most positive effect on inclusive growth when there is a sufficiently large manufacturing sector and a developed enough infrastructure base in the host country. These not very optimistic results emphasize the critical importance of the host country’s absorptive capacity. A smaller technological or knowledge gap with the foreign firms is required for FDI to lead to more linkages and spillovers, and ultimately job creation for the poor. The results cast doubt on development strategies that rely on FDI as a sufficient policy for inclusive growth.

Pages: 31 pages
Date: 2021-02
New Economics Papers: this item is included in nep-cse, nep-cwa, nep-dev, nep-fdg and nep-int
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Citations: View citations in EconPapers (9)

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https://icepp.gsu.edu/files/2021/06/21-04-FDI-and-Inclusive-Growth.pdf (application/pdf)

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Journal Article: When does foreign direct investment lead to inclusive growth? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ays:ispwps:paper2104

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