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Transition to FDI Openness: Reconciling Theory and Evidence

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  • Ellen R. McGrattan

Abstract

Empirical studies quantifying the economic effects of increased foreign direct investment (FDI) have not provided conclusive evidence that they are positive, as theory predicts. This paper shows that the lack of empirical evidence is consistent with theory if countries are in transition to FDI openness. Anticipated welfare gains lead to temporary declines in domestic investment and employment. Also, growth measures miss some intangible FDI, which is expensed from company profits. The reconciliation of theory and evidence is accomplished with a multicountry dynamic general equilibrium model parameterized with data from a sample of 104 countries during 1980-2005. Although no systematic benefits of FDI openness are found, the model demonstrates that the eventual gains in growth and welfare can be huge, especially for small countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16774.

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Date of creation: Feb 2011
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Publication status: published as Ellen McGrattan, 2012. "Transition to FDI Openness: Reconciling Theory and Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 437-458, October.
Handle: RePEc:nbr:nberwo:16774

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  1. Kose, Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2006. "Financial Globalization: A Reappraisal," CEPR Discussion Papers 5842, C.E.P.R. Discussion Papers.
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Cited by:
  1. Bridgman, Benjamin, 2014. "Do intangible assets explain high U.S. foreign direct investment returns?," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 159-171.
  2. Elgin, Ceyhun & Yucel, Emekcan, 2013. "Determinants of the weight for leisure in preferences," Economics Discussion Papers 2013-57, Kiel Institute for the World Economy.
  3. Manuel García-Santana, 2013. "Foreign Firms, Distribution of Income, and the Welfare of Developing Countries," 2013 Meeting Papers 1044, Society for Economic Dynamics.

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