How Does Foreign Direct Investment Effects on Host Country’s Gdp (Economic Growth)?

Topics: Economics, Developed country, Developing country Pages: 19 (5292 words) Published: April 13, 2012
The focus of this research is examining the affects of foreign direct investment on economic growth. Then the research reached this question: How Does Foreign Direct Investment Effects On Host Country’s GDP (Economic Growth)? Firstly, research starting with discussing the potential of FDI to affect host country’s economic growth and argues that two important objectes for FDI affects on economic growth, inflows of physical capital and technology spillovers, and according to research the technology spillovers have the stronger effect to enhance economic growth in the host country. Using cross section analysis with the range of ten years the empirical part of the paper reached a conclusion that FDI inflows improve economic growth in developing economies but not in developed economies as much as developing economies.

The research examine the effects of foreign direct invetsments on GDP growth in host country. The role which foreign direct investment (FDI) plays in the growth process in the source of developing countries characterised by differing trade policy regimes. This study is using cross-section data relating to a sample of thirty developing countries, and twenty developed countries, according to which the beneficial effect of FDI. The aim of the paper is to analyse that FDI inflows have a positive effect on host country economic growth. When I examine the previous paper, I conclude mixed results so this paper includes the mixed results of earlier research and most of them finding that FDI inflows have a positive effect on host country economic growth in developing but not in developed economies. Also, this paper is trying to analyze technology spillovers from MNEs( Multinational Enterprises) to domestic firms and physical capital of host country. Aim is trying to understand which one provide the most important connection for a positive effect from FDI on economic growth. 2.1. The Importance of MNEs and Technology Spillovers

For many cases of knowledge capital and technology, advanced technology is an essential item for them. Cause it is an advantage for MNE's. But, affects of technology is not only firm specific advantage of MNE's, it is also create a connection between growth of host country and FDI. Technology has a non rival point and that means MNEs trying to protect their technology. They do this with using their brand names or with using their patents. According to Hymer (1960), MNEs trying to prevent technology spillovers to other firms in other countries in terms of decrease their competitiveness. Technology spillovers can happenin variosun ways uch as imitation, supplier linkages and reverse engineering. In terms of positive externalities from technology spillovers allow FDI to improve increase in growth. With increasing competition and exporting of MNes to the third world countries, positive externalities may happen. Also, exporting to the third countries may help domestic firms to be competitive in their own market.

2.2. Physical capital and labour
As I mentioned before technology spillovers has a positive effect on host country's growth, but not just captal and knowledgeFDI also affects host country's human and physical capital. When the physical capital stock increases then it effects productivity of the host country. So prodactivity will inreses, too. But, its not an endless loop that when capital stock increases then productivity increases. So it has a breaking point. When we examine the Easterly and Levine (2001) growth accounting theory, they found that it does not have an important effect that investing in a physical capital to enhance growth because for the most of the cross country technological progress is more important for growth. But, according to Bond et al (2004) this conclusion is an early conclusion because their modeling is too limiting.

According to results in this category, FDI affects economic growth of host country in terms of technology spillovers...
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