This article surveys the latest developments in the literature on the impact of inward foreign direct investment (FDI) on growth in developing countries. In general, FDI is thought of as a composite bundle of capital stocks, know-how, and technology, and hence its impact on growth is expected to be manifold and vary a great deal between technologically advanced and developing countries. The ultimate impact of FDI on output growth in the recipient economy depends on the scope for efficiency spillovers to domestic firms, by which FDI leads to increasing returns in domestic production, and increases in the value-added content of FDI-related production.

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This article estimates the fiscal impact of coordination failures in intergovernmental fiscal relations. The coordination failures considered here are due to agency problems arising from the delegation of fiscal powers to sub‐national governments, and “common pool” problems associated with funding decentralised government spending through intergovernmental transfers. Particular attention is focused on the trade‐off between coordination and fiscal decentralisation. Evidence provided for a sample of thirty countries suggests that coordination failures are likely to result in a deficit bias in decentralized policy making, particularly in the case of developing countries, for which the benefits of decentralization may be over‐stressed. Developed countries were found to be less adversely affected by coordination failures and have therefore managed to pursue fiscal consolidation in a decentralized setup.

Countries that are rich in social capital, defined as the social and political institutions that stimulate interpersonal trust, civic cooperation, and social cohesiveness, tend to have more efficient governments, have better governance systems, and grow faster. This article provides preliminary cross-country evidence for a sample of developing and developed countries that fiscal decentralization-the assignment of expenditure functions and revenue sources to lower levels of government-can boost social capital.

Borrowing costs vary across different levels of government. Local governments often face costlier borrowing than their higher level counterparts. This article shows that the decentralization of expenditure functions and revenue sources to lower tiers of government has a bearing on local government borrowing costs. Empirical evidence is provided for a sample of industrial and developing economies in the period 1970 to 1995, using three different fiscal decentralization indicators and two different borrowing cost indices. The findings are robust to the inclusion of controls for additional determinants of subnational borrowing costs. An important implication of these results is that policies aimed at disciplining subnational finances in the process of fiscal decentralization also tend to reduce subnational borrowing costs.