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

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

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 91 (2010)
Issue (Month): 2 (March)
Pages: 242-256

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Handle: RePEc:eee:deveco:v:91:y:2010:i:2:p:242-256

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: FDI spillovers Backward linkages Financial development Economic growth;

References

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