Thesis: Growth and FDI

Sample Thesis Paper

Theory provides conflicting predictions concerning the growth effects of FDI. According to Borensztein, E, J de Gregorio and J W Lee (1998), FDI has a positive effect on economic growth through technology diffusion. They suggest that the main channel in which advanced technology can enter a country is through FDI, more specifically by MNCs. This grants the host country with technological progress through a process of ‘capital deepening’ with the introduction of new varieties of capital goods. For workers to access new technology, they require some training which in turn leads to human capital accumulation and economic development.

This is illustrated by the fact that when foreign firms introduce new products or processes to the host economy’s domestic market, domestic firms may benefit from the diffusion of new technology or the diffusion of new technology might occur when domestic employees move from foreign-owned to domestically owned firms (Borensztein et al 1998). Their findings also put forward that FDI has the effect of increasing total investment in the economy more than one-for-one, which suggests the complementarity between the domestic and foreign firms.

However, their findings suggest that there is a need for minimum threshold stock of human capital to be available in the economy for FDI to have its positive effects on economic growth. Therefore, FDI has a positive growth-effect when the country has a highly educated workforce that allows it to exploit FDI spillovers. Additionally, Mariam Khawar (2005) agrees that FDI has a positive impact  on GDP per capita, but in her findings human capital is not a requirement. Likewise, Blomstrom, Lipsey, and Zejan (1994) find no evidence that education is critical. However, they argue that FDI has a positive growth-effect when the country is sufficiently rich. L. Alfaro (2004) has the same results through his findings that FDI can promote economic growth. But, he believes that countries with well-developed financial markets can gain significantly higher.

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