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On the Role of Absorptive Capacity: FDI Matters to Growth

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  • Yuko Kinoshita

    ()

  • Chia-Hui Lu

    ()

Abstract

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.

Suggested Citation

  • Yuko Kinoshita & Chia-Hui Lu, 2006. "On the Role of Absorptive Capacity: FDI Matters to Growth," William Davidson Institute Working Papers Series wp845, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2006-845
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    References listed on IDEAS

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    Cited by:

    1. Wu, Jyun-Yi & Hsu, Chih-Chiang, 2012. "Foreign direct investment and income inequality: Does the relationship vary with absorptive capacity?," Economic Modelling, Elsevier, vol. 29(6), pages 2183-2189.

    More about this item

    Keywords

    foreign direct investment; economic growth; technology diffusion; infrastructure;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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