Role of Fdi in Economies

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Economic growth may additionally result from a wider range of intermediate goods in FDI-related production (Feenstra and Markusen, 1994). Caves (1996) observed that the rationale for increased efforts to attract more FDI stems from the belief that FDI has several positive effects. Among these are productivity gains, technology transfers, introduction of new processes, managerial skills and know-how in the domestic market, employee training, international production networks, and access to markets. Caves (1996) FDI leads to what is called “technology diffusion” – the transmission of ideas and new technologies, productivity spillovers, sharing and implementation of know-how, knowledge transfer ,all of which are important factors of economic development (Borensztein et al, 1998), Borensztein et al found that the interaction of FDI and human capital had important effect on economic growth, and suggest that the differences in the technological absorptive ability may explain the variation in growth effects of FDI across countries. They suggest further that countries may need a minimum threshold stock of human capital in order to experience positive effects of FDI. Borensztein et al. (1998 Balasubramanyan report positive interaction between human capital and FDI. They had earlier found significant results supporting the assumption that FDI is more important for economic growth in export-promoting than import-substituting countries. This implies that the impact of FDI varies across...
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