FDI Spillovers, Financial Markets and Economic Development

Laura Alfaro (), Areendam Chanda, Sebnem Kalemli-Ozcan () and Selin Sayek ()

No 03/186, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the role financial markets play in the relationship between foreign direct investment (FDI) and economic development. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company or undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI, magnifying the output effects of FDI. Empirically, we show that well-developed financial markets allow significant gains from FDI, while FDI alone plays an ambiguous role in contributing to development.

Keywords: Economic growth; Capital markets; Foreign investment (search for similar items in EconPapers)
Date: 2003-10-20
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