The Role of Foreign Direct Investment in Transformation

Abstract

This paper studies the effects of Foreign Direct Investment (FDI), domestic private investment, government expenditure and labour on economic growth using 1965 to 1992 data for 32 developing countries. The study finds that the contribution of domestic private investment to economic growth is more consistent and reliable than the contribution of FDI. Thus, FDI loses its attraction as an engine of growth if the adverse balance of payments consequences of the resulting profit repatriation are also taken into account. The study further finds that the contribution of government expenditure to economic growth is negligible and the productivity of labour is low, indicating that the growth strategy that neglects human capital cannot yield long-term benefits.