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FDI Spillovers, Financial Markets and Economic Development

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Author Info

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

Abstract

This paper examines the role financial markets play in the relationship between foreign direct investment (FDI) and economic development. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company or undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI, magnifying the output effects of FDI. Empirically, we show that well-developed financial markets allow significant gains from FDI, while FDI alone plays an ambiguous role in contributing to development.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/186.

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Length: 32
Date of creation: 01 Sep 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/186

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Related research

Keywords: Economic growth; Foreign direct investment; Foreign investment; fdi; financial markets; financial sector; financial market; foreign capital; direct investment; stock market; financial structure; financial institutions; foreign company; financial intermediaries; equity capital; liquid liabilities; deposit money; multinational enterprises; host country; financial intermediation; international financial statistics; credit markets; deposit money banks; financial system; technology transfers; stock trading; foreign direct investor; reinvestment of earnings; financial economics; net inflows of investment; financial market development; stock markets; mnes; foreign investors; foreign direct investors; equity markets; international country risk guide; domestic capital; foreign investments; stock market liquidity; financial repression; fixed investment; foreign enterprise; foreign affiliates; stock market capitalization; financial dependence; direct foreign investment; host countries; equity market; financial systems; credit market; industrial countries; foreign affiliate; financial services;

References

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  1. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
  2. Jeffrey Wurgler, 1999. "Financial Markets And The Allocation Of Capital," Yale School of Management Working Papers ysm123, Yale School of Management, revised 01 Mar 2001.
  3. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
  4. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," IDB Publications 6466, Inter-American Development Bank.
  5. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  6. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June.
  7. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Finance and the sources of growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125520, Tilburg University.
  8. David T. Coe & Elhanan Helpman & Alexander Hoffmaister, 1995. "North-South R&D Spillovers," NBER Working Papers 5048, National Bureau of Economic Research, Inc.
  9. Razin, A. & Sadka, E. & Yuen, C.-W., 1998. "An Information-Based Model of Foreign Direct Investment: the Gains from Trade Revisited," Papers 28-98, Tel Aviv.
  10. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  11. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
  12. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
  13. Marcelo Soto, 2000. "Capital Flows and Growth in Developing Countries: Recent Empirical Evidence," OECD Development Centre Working Papers 160, OECD Publishing.
  14. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  15. Barro, Robert J & Lee, Jong Wha, 1996. "International Measures of Schooling Years and Schooling Quality," American Economic Review, American Economic Association, vol. 86(2), pages 218-23, May.
  16. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  17. Xu, Bin, 2000. "Multinational enterprises, technology diffusion, and host country productivity growth," Journal of Development Economics, Elsevier, vol. 62(2), pages 477-493, August.
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Citations

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Cited by:
  1. Chang, Roberto & Kaltani, Linda & Loayza, Norman, 2005. "Openness can be good for growth : the role of policy complementarities," Policy Research Working Paper Series 3763, The World Bank.
  2. Ying Xu, 2012. "How does financial system efficiency affect the growth impact of FDI in China?: Evidence from provincial data 1999-2006," China Finance Review International, Emerald Group Publishing, vol. 2(2), pages 406-428, August.
  3. Boileau Loko & Mame Astou Diouf, 2009. "Revisiting the Determinants of Productivity Growth," IMF Working Papers 09/225, International Monetary Fund.
  4. Uppenberg, Kristian & Riess, Armin, 2004. "Determinants and growth effects of foreign direct investment," EIB Papers 3/2004, European Investment Bank, Economics Department.
  5. Gonzalez-Eiras, Martin & Prado, Jr., Jose Mauricio, 2007. "Determinants of Capital Intensive and R&D Intensive Foreign Direct Investment," Seminar Papers 753, Stockholm University, Institute for International Economic Studies.
  6. Crespo, Nuno & Fontoura, Maria Paula, 2007. "Determinant Factors of FDI Spillovers - What Do We Really Know?," World Development, Elsevier, vol. 35(3), pages 410-425, March.
  7. Marcus Noland, 2005. "Popular Attitudes, Globalization and Risk," International Finance, Wiley Blackwell, vol. 8(2), pages 199-229, 08.
  8. Ying Xu, 2009. "How Does Financial System Efficiency Affect the Growth Impact of FDI in China?," Development Economics Working Papers 22885, East Asian Bureau of Economic Research.
  9. Sandrine Levasseur, 2006. "Convergence and FDI in an enlarged EU: what can we learn from the experience of cohesion countries for the CEECS?," Documents de Travail de l'OFCE 2006-12, Observatoire Francais des Conjonctures Economiques (OFCE).
  10. Dutta, Nabamita & Roy, Sanjukta, 2008. "The Role of Foreign Direct Investment on Press Freedom," MPRA Paper 10185, University Library of Munich, Germany, revised 18 Jul 2008.

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