Capital Knowledge Essay

4831 WordsMay 3, 201320 Pages
The Economic Journal, io6 [January], 92-105. © Royal Economic Society 1996. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 iJF, UK and 238 Main Street, Cambridge, MA 02142, USA. FOREIGN DIRECT INVESTMENT AND GROWTH IN EP AND IS COUNTRIES* V. N. Balasubramanyam, M. Salisu and David Sapsford This paper examines, within a new growth theory framework, the role which foreign direct investment (FDI) plays in the growth process in the context of developing countries characterised by differing trade policy regimes. The paper tests (using cross-section data relating to a sample of forty-six developing countries) the hypothesis advanced by Jagdish Bhagwati, according to which the beneficial effect of FDI, in terms of enhanced economic growth, is stronger in those countries which pursue an outwardly oriented trade policy than it is in those countries adopting an inwardly oriented policy. The role of foreign direct investment (FDI) in the growth process has for long been a topic of intense debate. Although this debate has provided rich insights into the relationship between FDI and growth there is very little empirical analysis of the issue, partly because of the lack of a conceptual design and a succinct testable hypothesis. Recent developments in growth theory, styled endogenous growth theory, provide such a conceptual framework for analysing the impact of FDI on growth. While the relationship between exports and growth, grounded in endogenous growth theory, has been the subject of a number of recent papers (e.g. Greenaway and Sapsford, 1994) the interrelationship between trade pohcy, FDI and growth is yet to be analysed. Such an analysis is timely in view of the new-found enthusiasm for FDI on the part of most developing countries. This paper analyses the relationship between trade strategy, FDI and growth in developing countries in the context of new
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