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On the Role of Absorptive Capacity: FDI Matters to Growth

  • Yuko Kinoshita

    ()

  • Chia-Hui Lu

    ()

The paper studies the effects of foreign direct investment (FDI) on economic growth when sufficient provisions of infrastructure is a pre-requisite. In the overlapping generations setting, we show that technology spillovers via FDI take place only when the host country has the sufficient level of infrastructure. Infrastructure has a subsequent positive feedback on further investment which leads the country to grow faster. If infrastructure falls short of the critical level, however, then FDI has little effect on growth as the country is trapped in a lowgrowth equilibrium. We also present the simulations and empirical results based on panel data for 42 developing countries between 1970 and 2000. They support the model that FDI and infrastructure are complementary in affecting per capita GDP growth.

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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp845.pdf
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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp845.

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Length: pages
Date of creation: 01 Nov 2006
Date of revision:
Handle: RePEc:wdi:papers:2006-845
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