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The Role of FDI in Economic Development


  • Kjetil Bjorvatn
  • Hans Jarle Kind
  • Hildegunn Kyvik Nordås


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.

Suggested Citation

  • Kjetil Bjorvatn & Hans Jarle Kind & Hildegunn Kyvik Nordås, 2002. "The Role of FDI in Economic Development," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 28, pages 109-126.
  • Handle: RePEc:noj:journl:v:28:y:2002:p:109-126

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    References listed on IDEAS

    1. Blomstrom, Magnus & Sjoholm, Fredrik, 1999. "Technology transfer and spillovers: Does local participation with multinationals matter?1," European Economic Review, Elsevier, vol. 43(4-6), pages 915-923, April.
    2. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
    3. Blomstrom, Magnus & Wolff, E.N., 1989. "Multinational Corporations And Productivity Convergence In Mexico," Working Papers 89-28, C.V. Starr Center for Applied Economics, New York University.
    4. Kokko, Ari, 1994. "Technology, market characteristics, and spillovers," Journal of Development Economics, Elsevier, vol. 43(2), pages 279-293, April.
    5. Cororaton, Caesar B. & Abdula, Rahimaisa, 1999. "Productivity of Philippine Manufacturing," Discussion Papers DP 1999-21, Philippine Institute for Development Studies.
    6. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    7. Robert E. Lipsey, 2000. "Affiliates of U.S. and Japanese Multinationals in East Asian Production and Trade," NBER Chapters,in: The Role of Foreign Direct Investment in East Asian Economic Development, NBER-EASE Volume 9, pages 147-189 National Bureau of Economic Research, Inc.
    8. Haddad, Mona & Harrison, Ann, 1993. "Are there positive spillovers from direct foreign investment? : Evidence from panel data for Morocco," Journal of Development Economics, Elsevier, vol. 42(1), pages 51-74, October.
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    Cited by:

    1. Busse, Matthias, 2002. "Do transnational corporations care about labour standards?," HWWA Discussion Papers 182, Hamburg Institute of International Economics (HWWA).
    2. Thandar, Khine, 2008. "Foreign Direct Investment Relations between Myanmar and ASEAN," IDE Discussion Papers 149, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    3. repec:ers:journl:v:xx:y:2017:i:3a:p:758-773 is not listed on IDEAS

    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries


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