How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in ABSTRACTThe empirical literature finds mixed evidence on the existence of positive productivity externalities in the host country generated by foreign multinational companies. We propose a mechanism that emphasizes the role of local financial markets in enabling foreign direct investment (FDI) to promote growth through backward linkages, shedding light on this empirical ambiguity. In a small open economy, final goods production is carried out by foreign and domestic firms, which compete for skilled labor, unskilled labor, and intermediate products. To operate a firm in the intermediate goods sector, entrepreneurs must develop a new variety of intermediate good, a task that requires upfront capital investments. The more developed the local financial markets, the easier it is for credit constrained entrepreneurs to start their own firms. The increase in the number of varieties of intermediate goods leads to positive spillovers to the final goods sector. As a result financial markets allow the backward linkages between foreign and domestic firms to turn into FDI spillovers. Our calibration exercises indicate that a) holding the extent of foreign presence constant, financially well-developed economies experience growth rates that are almost twice those of economies with poor financial markets, b) increases in the share of FDI or the relative productivity of the foreign firm leads to higher additional growth in financially developed economies compared to those observed in financially under-developed ones, and c) other local conditions such as market structure and human capital are also important for the effect of FDI on economic growth.

The Transformation of Nigeria’s Industrial Sector: Some Explanatory Variables

“…The ambiguity on the link between FDI and economic development has been traced to infrastructural development with the link being stronger where there is developed infrastructure than places where it is kindergarten (Wheeler and Mody, 1992). Studies have also shown that FDI introduces technology and management know-how in addition to bringing new processes and bridges the capital shortage found in developing economies (Alfaro, 2006) and (Tang, Selvanathan and Selvanathan, 2008).…”

“Revenue Management” Effects Related to Financial Flows Generated by Climate Policy

“…Some even more recent work, by Alfaro (2003) and Alfaro et al (2006), however points to some avenues for FDI to influence growth. In particular, Alfaro (2003) finds that FDI directed toward the manufacturing sector exhibits growth effects, while FDI in primary sectors does not: here FDI seems instead to have a negative effect on growth.…”

Spillovers from FDI and local networks

“…(1999), although in a different context. Others have focused on links between FDI and financial markets (Alfaro et al, 2006).…”