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Transition to FDI Openness: Reconciling Theory and Evidence


  • Ellen McGrattan

    (Federal Reserve Bank of Minneapolis)


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. (Copyright: Elsevier)

Suggested Citation

  • 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:red:issued:12-94
    DOI: 10.1016/

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    References listed on IDEAS

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    Cited by:

    1. Elgin, Ceyhun & Yucel, Emekcan, 2014. "Determinants of the weight for leisure in preferences," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-26.
    2. Contessi, Silvio, 2015. "Multinational firms׳ entry and productivity: Some aggregate implications of firm-level heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 61-80.
    3. Simeon Alder & David Lagakos & Lee Ohanian, 2014. "Competitive Pressure and the Decline of the Rust Belt: A Macroeconomic Analysis," NBER Working Papers 20538, National Bureau of Economic Research, Inc.
    4. L. Kamran Bilir & Eduardo Morales, 2016. "Innovation in the Global Firm," NBER Working Papers 22160, National Bureau of Economic Research, Inc.
    5. Napiórkowski1 Tomasz M., 2014. "International Trade and Foreign Direct Investment as Innovation Factors of the U.S. Economy," International Journal of Management and Economics, De Gruyter Open, vol. 41(1), pages 60-75, March.
    6. Bridgman, Benjamin, 2014. "Do intangible assets explain high U.S. foreign direct investment returns?," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 159-171.
    7. Natalia Ramondo, 2015. "Innovation and Production in the Global Economy," 2015 Meeting Papers 183, Society for Economic Dynamics.

    More about this item


    Foreign direct investment; Technological capital; Development;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D


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