Foreign Direct Investment ( Fdi ) Stimulates Economic Development

878 Words Dec 8th, 2016 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 hazard theory. The second theory is the neoclassic model of economic growth. According to moral hazard theory, circumspect behavior occurs when individuals, organizations, or even nations have to bear responsibility for their own actions (Moyo 3). The moral hazard argument against FDI is that, when developing countries receive infusions of direct investment, they are thereby insulated from their own bad decision-making, institutional structures, and policy approaches (Eichengreen 17). This argument is closely related to the claims that, in many cases, (a) FDI is not genuinely market-based, but, rather, reflects rewards and incentives for developing nations; and…

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