This study examines the role of trade policy regimes in conditioning the impact of foreign direct investment (FDI) on growth performance in investment receiving (host) countries through a case study of Thailand. The methodology involves estimating a growth equation, which provides for capturing the impact of FDI interactively with economic openness on economic growth, using data for the period 1970-2006. The result of the whole period (1970-2006) is not consistent with the Bhagwati hypothesis. However, the result of the pre-crisis model (1970-1996) is consistent with the Bhagwati hypothesis, that is, other things being equal, the growth impact of FDI tends to be greater under an export promotion (EP) trade regime compared to an import-substitution (IS) regime.
The role of foreign direct investment (FDI) has been widely recognized as a growth-enhancing factor in developing countries. In a closed economy, with no access to foreign saving, investment is financed both through domestic savings. However, in an open economy, investment is financed through both domestic saving and foreign capital flow including FDI.
Hence, FDI enables investment-receiving countries to achieve investment levels beyond their own domestic saving.
More importantly, FDI is an important means of transferring modern technology and innovation from developed to developing countries that can enhance the technological capability of the host country firms, thereby generating long-term and sustainable economic growth. However, there is convincing evidence that the growth-enhancing effect from FDI seems to vary from country to country and for some countries FDI can even adversely affect the growth process (Balasubramanyam et al., 1996; Borensztein et al., 1998; De Mello, 1999; Lipsey, 2000; Xu, 2000).
Hence, the growth-enhancing... [continues]
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