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When Does Foreign Direct Investment Lead to Inclusive Growth?

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  • Hyojung Kang

    (Economics Department and International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University)

  • Jorge Martinez-Vazquez

    (International Center for Public Policy, Georgia State University, USA)

Abstract

Foreign Direct Investment (FDI) is widely considered among the most effective instruments for the promotion of economic development. However, not all FDI leads to inclusive economic growth, lifting the welfare of the poorest groups in developing countries. This paper examines the conditions under which FDI can effectively lead to inclusive growth. By using a fixed effects regression with annual data for 68 countries from 1990 to 2015, we find that FDI has the most positive effect on inclusive growth when there is a sufficiently large manufacturing sector and a developed enough infrastructure base in the host country. These not very optimistic results emphasize the critical importance of the host country’s absorptive capacity. A smaller technological or knowledge gap with the foreign firms is required for FDI to lead to more linkages and spillovers, and ultimately job creation for the poor. The results cast doubt on development strategies that rely on FDI as a sufficient policy for inclusive growth.

Suggested Citation

  • Hyojung Kang & Jorge Martinez-Vazquez, 2021. "When Does Foreign Direct Investment Lead to Inclusive Growth?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper2104, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:ays:ispwps:paper2104
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    File URL: https://icepp.gsu.edu/files/2021/06/21-04-FDI-and-Inclusive-Growth.pdf
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    Cited by:

    1. Ofori, Isaac K. & Asongu, Simplice A., 2022. "Repackaging FDI for Inclusive Growth: Nullifying Effects and Policy Relevant Thresholds of Governance," MPRA Paper 111359, University Library of Munich, Germany.
    2. Firat Emir & Edmund Ntom Udemba & Nazakat-Ullah Khan & Sadam Hussain, 2024. "Interactions among technological innovation, foreign direct investment, and agriculture: A symmetric and asymmetric study of inclusive sustainable development," Energy & Environment, , vol. 35(2), pages 1031-1049, March.
    3. Emeka NKORO, Aham & Kelvin UKO, 2023. "Foreign Direct Investment And Inclusive Growth: The Role Of The Financial Sector Development In Nigeria, 1981-2020," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 23(1), pages 77-100.
    4. Jinapor, John Abdulai & Abor, Joshua Yindenaba & Graham, Michael, 2025. "Energy consumption and inclusive growth in Sub-Saharan Africa: Does foreign direct investment make a difference?," Energy Policy, Elsevier, vol. 198(C).
    5. repec:jaf:journl:v:13:y:2022:i:2:n:477 is not listed on IDEAS
    6. Abbas, Syed Jaffar & Arshed, Noman & Iqbal, Asim, 2024. "Investigating the impact of FDI on regional economic misery – A nonlinear panel data analysis," Research in Economics, Elsevier, vol. 78(4).
    7. Maza, Adolfo & Hierro, Maria, 2025. "Delving into the FDI-economic growth relationship at the regional level: Headquarters effect in FDI data," International Review of Economics & Finance, Elsevier, vol. 97(C).
    8. John Abdulai Jinapor & Joshua Yindenaba Abor & Michael Graham, 2024. "FDI, industrialisation and environmental quality in SSA—the role of institutional quality towards environmental sustainability," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 11(1), pages 1-15, December.
    9. Emeka Nkoro & Aham Kelvin Uko, 2022. "Foreign Direct Investment and Inclusive Growth: The Role of the Financial Sector Development," International Journal of Economic Sciences, European Research Center, vol. 11(2), pages 144-162, November.
    10. Dwumfour, Richard Adjei & Pan, Lei & Harris, Mark N., 2023. "FDI and development redux: Is R&D a substitute for FDIs?," MPRA Paper 116117, University Library of Munich, Germany.

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