Fdi And Economic Development

878 Words 4 Pages
1. Introduction The purpose of this essay is to evaluate arguments related to the claim that foreign direct investment (FDI) stimulates economic development. The essay consists of two portion. First, theories relating to the link between FDI and economic development have been considered. Second, the empirical evidence pertaining to the FDI-economic development link have been evaluated. The conclusion provides an evidence-based answer to the question of whether FDI is linked to economic development. The conclusion is that FDI does appear to contribute to the economic growth of developing countries, especially in an environment of good governance and institutions.
2. Theoretical Basis There are two theories that are particularly applicable to the link between FDI and economic development. The first theory is moral
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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.
Table 1
The Six Components of WGI as Defined by the World Bank (WB

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