Does FDI Cause Development? The Ambiguity of the Evidence and Why it Matters

Abstract

The contribution that inward FDI makes to development has been examined in a number of contexts including the relationship between inward FDI and new firm formation; growth; innovation, exports and competitiveness. However, no debate has proved so contentious, or so long lasting as that concerning the extent to which inward FDI stimulates productivity growth in the host country. There are two reasons for this. The first is simply the importance of the question. The growth literature is consistent in identifying productivity growth as the main driver of development. Studies by Klenow and Rodriguez-Clare (1997), Hall and Jones (1999) and Easterly and Levine (2001) among others have demonstrated that total factor productivity growth explains far more of the variation in cross country per capita income growth than the more traditional drivers of growth such as institutions or capital (physical and human) accumulation. Secondly, both policy makers and academics have long since held the view that there exist "spillovers" from FDI. That is, inward investment generates some form of indirect knowledge or technology transfer from parent to affiliate, and subsequently from affiliate to the local economy (Driffield et al 2010). The big questions that form the basis of this debate forum are simple enough: Do MNEs cause net positive externalities to host countries or not?Why is the empirical evidence on the role of FDI in development so ambiguous, especially for the developing countries? Given the vigour and universality with which FDI (circa 2012) is considered to be a 'good thing', central to the economic development plans of almost all developing countries, an outsider may be forgiven for thinking that these questions should by now have unequivocally positive answers. However, these are not innocuous questions that trouble only a few specialists in the field interested in the arcane minutiae of theory, as this debate forum intends to illustrate.The importance placed by nation states on attracting FDI borders on the obsessive. FDI is seen by most countries as an elixir: a source of management techniques, technologies, best practice in governance, capital, etc. There are a variety of investment promotion agencies seeking to attract multinational enterprises (MNEs) to particular locations through myriad systems of incentives.Supranational and international agencies (from the OECD and the UN to the WTO and the EU), donor countries and NGOs offer guidelines, training programmes, advice, how-to manuals and assistance on how to negotiate, attract and embed MNEs. International agreements (some non-binding and others binding) on FDI and MNEs are attached to almost every bilateral and multilateral initiative.1 Henley Business School, University of Reading, RG6 AA, UK 2 Aston Business School, Aston University, B4 7ET, UK It has not always been so.Less than 40 years ago, MNEs were seen as the sharp and unpleasant edge of capitalism and neocolonialism, the cause of persistent underdevelopment, capital shortages and a threat to politica...

International business research and risky investments, an analysis of FDI in conflict zones

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Knowledge Spillovers from FDI: A Critical Review from the International Business Perspective

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“…24, 2012) on FDI‐assisted development, which suggests that FDI‐KSs are governed by the interaction among variables operating at different levels of analysis (e.g. firm, context, institutions) (Narula and Driffield ). Following this multilevel approach, we develop a framework for the analysis of FDI‐KSs, which incorporates relevant antecedents and consequences.…”

Determinants of Human Capital Intensity: An Empirical Analysis on Automotive Suppliers in Turkey

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