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FDI Spillovers, Financial Markets, and Economic Development

  • Selin Sayek
  • Laura Alfaro
  • Areendam Chanda
  • Sebnem Kalemli-Ozcan

This paper examines the role financial markets play in the relationship between foreign direct investment (FDI) and economic development. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company or undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI, magnifying the output effects of FDI. Empirically, we show that well-developed financial markets allow significant gains from FDI, while FDI alone plays an ambiguous role in contributing to development.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/186.

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Length: 32
Date of creation: 01 Sep 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/186
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