Fdi And Economic Development
2. Theoretical Basis There are two theories that are particularly applicable to the link between FDI and economic development. The first theory is moral …show more content…
The Empirical Evidence Fortunately, there is a substantial amount of empirical evidence pertaining to the link between FDI and economic development. An empirical study (Makki and Somwaru 795) that drew upon cross-sectional rather than time-series methods found that FDI has a positive impact on GDP in developing countries. Makki and Somwaru’s statistical testing revealed that this positive impact is related to the ability of FDI to stimulate domestic investment, a category of investment that could conceivably include gross capital formation, technology development, infrastructure development, and the improvement of human resources via education and other factors. Finally, Makki and Somwaru also found that the relationship between FDI and economic growth was stronger in the presence of strong political institutions. One commonly used empirical framework for quantifying the kinds of governance and institutions that need to be in place for FDI to contribute more forcefully to economic growth is that of the World Governance Indicators. These indicators are listed in Table 1 below.
The Six Components of WGI as Defined by the World Bank (WB