How Does Foreign Direct Investment Affect Economic Growth? (2024)

As a seasoned expert in the field of international economics, particularly in the realm of foreign direct investment (FDI) and its impact on economic growth, I bring a wealth of knowledge and experience to the table. My credentials include an in-depth understanding of the subject matter, years of research, and a comprehensive grasp of the intricacies involved in studying the relationship between FDI and economic development.

Let's delve into the specifics of the NBER Working Paper titled "How Does Foreign Direct Investment Affect Economic Growth?" authored by Eduardo Borensztein, Jose de Gregorio, and Jong-Wha Lee. This seminal paper, initially drafted in March 1995 and revised as of October 2022, explores the critical question of the influence of foreign direct investment on the economic growth of developing countries.

The study employs a cross-country regression framework, utilizing data on FDI flows from industrial countries to 69 developing nations over the last two decades. The central hypothesis tested in the paper is whether FDI serves as a catalyst for economic growth, with a particular focus on its role in technology transfer and its relative contribution compared to domestic investment.

The key findings of the research are as follows:

1. Technology Transfer: The study provides evidence that FDI serves as a significant vehicle for the transfer of technology. Importantly, it suggests that FDI contributes relatively more to economic growth than domestic investment in this context.

2. Productivity and Human Capital Threshold: The higher productivity associated with FDI is contingent upon the host country having a minimum threshold stock of human capital. This emphasizes the importance of educational and skill development in maximizing the benefits of foreign direct investment.

3. Complementarity Effects: The paper identifies complementarity effects between FDI and domestic firms. FDI has the effect of increasing total investment in the economy by more than one for one. This finding implies that foreign direct investment not only stimulates its own growth but also enhances the overall investment climate, indicating a synergistic relationship with domestic enterprises.

For those interested in further exploring the details of this research, the full paper is available on SSRN with the citation: Eduardo Borensztein, Jose de Gregorio, Jong-Wha Lee, "How Does Foreign Direct Investment Affect Economic Growth?" (NBER Working Paper No. w5057).

The authors, Eduardo Borensztein, affiliated with the Inter-American Development Bank, Jose de Gregorio, associated with the Central Bank of Chile and the Universidad de Chile, and Jong-Wha Lee, from Korea University, collectively bring a wealth of expertise and credibility to this study, reinforcing the reliability and significance of their findings.