Does foreign direct investment promote growth? Exploring the role of financial markets on linkages

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

Journal of Development Economics, 2010, vol. 91, issue 2, 242-256

Abstract: Do multinational companies generate positive externalities for the host country? The evidence so far is mixed varying from beneficial to detrimental effects of foreign direct investment (FDI) on growth, with many studies that find no effect. In order to provide an explanation for this empirical ambiguity, we formalize a mechanism that emphasizes the role of local financial markets in enabling FDI to promote growth through backward linkages. Using realistic parameter values, we quantify the response of growth to FDI and show that an increase in the share of FDI leads to higher additional growth in financially developed economies relative to financially under-developed ones.

Keywords: FDI; spillovers; Backward; linkages; Financial; development; Economic; growth (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (239)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:91:y:2010:i:2:p:242-256

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