FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH: TAKING STOCK OF THE CURRENT STATE OF EMPIRICAL RESEARCH

Abstract

Taking into account theory of foreign direct investment (FDI) with neoclassical and endogenous theories of economic growth, FDI has been identified as a factor which directly (capital accumulation) and indirectly (technology transfer) positively influences economic growth. However, empirical findings regarding this matter are quite diverse. Hence, the purpose of the paper is to take a critical view of the current state of empirical research regarding the impact of FDI on the recipient country's economic growth. In doing so, this research will inevitably take a view of the total global FDI inflows from 1970 until present time. The general finding is that there exists no unanimous conclusion as to the impact of capital inflow on the host country’s economic growth due to a variety of reasons sometimes not properly treated within the empirical analytical models. More specifically, this impact varies from being very positive to neutral, at best, or even negative. The reasons for such ambiguous findings arise from analytical weaknesses (the way in which analytical samples are created) and the lack of better understanding of theoretical and empirical aspects of the contribution of foreign capital to the host country's economic growth (no differentiation between short- and long-term effects).

Keywords

• FDI
• economic growth
• greenfield investment
• mergers and acquisition.