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Escaping the middle income trap and getting economic growth: How does FDI can help the host country?

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  • Thanh Tam Nguyen-Huu

    (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie)

  • Ngoc-Sang Pham

    (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie)

Abstract

The paper investigates the country receiving FDI's optimal strategy in an optimal growth context. First, if the multinational enterprise has high productivity or the entry cost is high, no domestic firm enters the new industry. Still, the host economy's investment stock converges to a higher steady state than that of the closed economy. Second, if the old sector is strong enough and the domestic firm's productivity is high, the foreign firm will be dominated, even eliminated by the domestic one. Third, we show that if the host country invests in R&D, its economy may grow without bounds. In this case, FDI helps the host country only at the first stages of its development process. We present empirical evidence that supports our theoretical findings.

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  • Thanh Tam Nguyen-Huu & Ngoc-Sang Pham, 2021. "Escaping the middle income trap and getting economic growth: How does FDI can help the host country?," Working Papers halshs-03143087, HAL.
    • Handle: RePEc:hal:wpaper:halshs-03143087
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03143087
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    Cited by:

    1. Thanh Tam Nguyen-Huu, 2023. "FDI spillovers and productivity in Vietnamese manufacturing industries - New insights from the unconditional quantile regression," Post-Print hal-04244612, HAL.

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    More about this item

    Keywords

    Optimal growth; FDI; MNE; R&D; fixed cost;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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