The Role of FDI in Economic Development
This paper deals with two questions: First, what are the determinants of foreign direct investment (FDI)? Second, what is the role of FDI in economic development? In order to provide some answers to these questions, we draw upon the existing theoretical and empirical literature as well as insights derived from five country studies that we have conducted. Important location advantages include a stable social, political and economic environment, liberal trade policies, and geographical proximity to large and growing economies. On the host country effects of FDI, we conclude that while FDI is not necessary to achieve economic development, the entry of foreign firms may play an important role in adding technology and competition to the host economies. However, foreign entry may lead to a loss in market shares, and thereby a loss in profits, for local firms. This problem is likely to be more important if foreign entry takes place in markets shielded from the competitive pressures of international trade.
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