On the Role of Absorptive Capacity: FDI Matters to Growth

Yuko Kinoshita () and Chia-Hui Lu

No wp845, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: The paper studies the effects of foreign direct investment (FDI) on economic growth when sufficient provisions of infrastructure is a pre-requisite. In the overlapping generations setting, we show that technology spillovers via FDI take place only when the host country has the sufficient level of infrastructure. Infrastructure has a subsequent positive feedback on further investment which leads the country to grow faster. If infrastructure falls short of the critical level, however, then FDI has little effect on growth as the country is trapped in a lowgrowth equilibrium. We also present the simulations and empirical results based on panel data for 42 developing countries between 1970 and 2000. They support the model that FDI and infrastructure are complementary in affecting per capita GDP growth.

Keywords: foreign direct investment; economic growth, technology diffusion, infrastructure (search for similar items in EconPapers)
JEL-codes: F21 H54 O33 O40 (search for similar items in EconPapers)
Pages: pages
Date: 2006-11-01
New Economics Papers: this item is included in nep-dev and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: On the Role of Absorptive Capacity: FDI Matters to Growth (2006)
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