Foreign direct investment and economic growth: literature review

Abstract

The spectacular growth in foreign direct investment flows around the world in the late 70s had a significant impact on the global economy. A number of developing countries have seen their economies revive by following the trend of globalization and market liberalization, and by adopting strategies to attract foreign direct investment. The positive role played by the presence of multinationals in host countries is both visual and remarkable, but there is no consensus, particularly in the empirical literature. In this article, we present a classic narrative literature review on the impact of foreign direct investment in economic growth. Analysis has shown that foreign direct investment can have a positive impact on economic growth in the short term, directly through capital accumulation and technology transfer between multinationals and their subsidiaries, and a more significant impact in the long term through the vertical and horizontal externalities that MNFs diffuse in host economies, local firms benefit from these spillovers through diffusion channels, while the divergence of empirical results can be explained by the host country's ability  to provide the preconditions for absorbing externalities.

Keywords: Foreign direct investment, spillovers, human capital, economic growth.

JEL Classification : B1, F23, F43, F21, Q56.

Paper type : Theoretical Research