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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. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  2. 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.
  3. Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
  4. Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 1999. "An Information-Based Model of Foreign Direct Investment: The Gains from Trade Revisited," International Tax and Public Finance, Springer, Springer, vol. 6(4), pages 579-596, November.
  5. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 605-618, June.
  6. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  7. Coe, David T & Helpman, Elhanan & Hoffmaister, Alexander W, 1997. "North-South R&D Spillovers," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(440), pages 134-49, January.
  8. repec:fth:wobaco:1083 is not listed on IDEAS
  9. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
  10. Barro, Robert J & Lee, Jong Wha, 1996. "International Measures of Schooling Years and Schooling Quality," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 218-23, May.
  11. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," Research Department Publications, Inter-American Development Bank, Research Department 4203, Inter-American Development Bank, Research Department.
  12. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 537-58, June.
  13. Marcelo Soto, 2000. "Capital Flows and Growth in Developing Countries: Recent Empirical Evidence," OECD Development Centre Working Papers 160, OECD Publishing.
  14. Jeffrey Wurgler, 1999. "Financial Markets And The Allocation Of Capital," Yale School of Management Working Papers, Yale School of Management ysm123, Yale School of Management, revised 01 Mar 2001.
  15. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  16. Xu, Bin, 2000. "Multinational enterprises, technology diffusion, and host country productivity growth," Journal of Development Economics, Elsevier, Elsevier, vol. 62(2), pages 477-493, August.
  17. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Marcus Noland, 2004. "Popular Attitudes, Globalization, and Risk," Working Paper Series, Peterson Institute for International Economics WP04-2, Peterson Institute for International Economics.
  2. Chang, Roberto & Kaltani, Linda & Loayza, Norman V., 2009. "Openness can be good for growth: The role of policy complementarities," Journal of Development Economics, Elsevier, Elsevier, vol. 90(1), pages 33-49, September.
  3. Nuno Crespo & Maria Paula Fontoura, 2005. "Determinant Factors of FDI Spillovers – What Do We Really Know?," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2005/06, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. Gonzalez-Eiras, Martin & Prado, Jr., Jose Mauricio, 2007. "Determinants of Capital Intensive and R&D Intensive Foreign Direct Investment," Seminar Papers, Stockholm University, Institute for International Economic Studies 753, Stockholm University, Institute for International Economic Studies.
  5. 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.
  6. 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.
  7. Boileau Loko & Mame Astou Diouf, 2009. "Revisiting the Determinants of Productivity Growth," IMF Working Papers 09/225, International Monetary Fund.
  8. 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, Emerald Group Publishing, vol. 2(2), pages 406-428, August.
  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, Observatoire Francais des Conjonctures Economiques (OFCE) 2006-12, Observatoire Francais des Conjonctures Economiques (OFCE).
  10. Uppenberg, Kristian & Riess, Armin, 2004. "Determinants and growth effects of foreign direct investment," EIB Papers 3/2004, European Investment Bank, Economics Department.

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