According to L. Alfaro (2004) “lack of development of financial markets, in particular, can adversely limit an economy’s ability to take advantage of such potential FDI benefits”. These benefits are referent to spillovers and efficiency outcomes from FDI. He further states that many countries have established investment agencies to attract FDI which grant foreign and local firms with fiscal and financial incentives. This is important as various international nations and foreign advisors recommend developing countries to rely primarily on FDI as source of external finance (UNCTAD (1995)). The rationale behind this recommendation is that FDI is less volatile than other capital inflows and that it stimulates economic growth not just through capital but also through modern technology and know-how. It seems ambiguous as empirical evidence for such policy advice is hard to support.

According to Neo-liberal economists, FDI is completely beneficial for the host economy, mainly in the long-run. They argue that FDI transfers technological spillover and markets access spillover, which both are proven to increase productivity.

They suggest that capital coming from abroad allow a more efficient use of that capital. As new firms or MNCs enter the market, they will require labour, causing labour demand to increase and consequently employment and wages. Then, technological transfer will be undertaken directly between foreign and direct investors or indirectly by transfer of knowledge when a worker leaves the foreign firm and gets employed in the domestic firm. Technological transfers have been shown to  “increase the productivity of both labour and capital.”