The Elusive Link Between FDI and Economic Growth: Sectoral Heterogeneity and Global Value Chains

Bénétrix, Agustín, Hayley Pallan and Ugo Panizza

No 21021, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper reassesses the relationship between foreign direct investment (FDI) and economic growth in emerging and developing economies. Using cross-country data, it first shows that the relationship between FDI, growth, and local conditions such as financial depth and human capital is not stable over time: complementarities documented in studies based on data from the 1970s and 1980s largely disappear in more recent decades. It then builds a new dataset on sectoral FDI covering 112 emerging and developing economies and documents substantial heterogeneity in the association between FDI and sectoral growth. FDI inflows are positively associated with growth in the primary sector, show no robust relationship in the secondary sector, and are negatively associated with growth in the tertiary sector. To interpret these patterns, we examine the role of global value chains (GVCs). We find that FDI is most strongly associated with growth in country–sectors with low GVC participation, while this relationship weakens or disappears as GVC integration increases. Moreover, the growth effects of FDI depend critically on the type of GVC integration. Backward participation amplifies the positive growth effects of FDI in the primary sector but attenuates them in the secondary sector and worsens the negative effects in tertiary sector, whereas forward participation strengthens the association between FDI and growth in manufacturing. Taken together, the results suggest that the elusive aggregate relationship between FDI and growth reflects a structural transformation in how foreign investment is embedded in global production networks: in highly fragmented value chains, FDI can expand gross activity without generating commensurate domestic value-added growth.

JEL-codes: C23 F14 F21 F23 F60 (search for similar items in EconPapers)
Date: 2026-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21021 (application/pdf)

Related works:
Working Paper: The Elusive Link Between FDI and Economic Growth: Sectoral Heterogeneity and Global Value Chains (2026)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21021

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21021

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().