FDI versus R\&D in an endogenous growth model

Thanh Tam Nguyen-Huu and Ngoc-Sang Pham
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Thanh Tam Nguyen-Huu: EM Normandie

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Abstract: We investigate the role of foreign direct investment (FDI) and research and development (R\&D) in the transitional dynamics of host countries using an optimal growth model. FDI may benefit the host country's GNP by enabling multinational enterprises to hire local workers. However, if the host country focuses solely on FDI, it may fall into a middle-income trap. Most importantly, we show that if the host country invests in R\&D, its economy can reach sustained growth. In this case, FDI benefits the host country, but only in the early stages of its development process.

Date: 2025-01, Revised 2026-04
New Economics Papers: this item is included in nep-fdg, nep-gro, nep-int and nep-inv
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