Foreign Direct Investment, Trade Openness, and Economic Growth: A Review of Theoretical Channels, Empirical Evidence, and Conditional Effects

Abstract

This review examines the relationship among foreign direct investment (FDI), trade openness, and economic growth, with emphasis on the channels through which external integration influences development outcomes. The literature generally suggests that FDI can raise growth through capital accumulation, technology transfer, productivity gains, and stronger linkages with domestic firms, while trade openness can promote growth by expanding market access, increasing competition, and improving resource allocation. However, the evidence is not uniform: some studies report that trade openness is the main driver of growth, while others find that FDI has a stronger effect, or that both variables matter only under favorable macroeconomic, institutional, and financial conditions. This review synthesizes theoretical arguments and empirical findings, identifies major transmission mechanisms and conditional factors, and highlights the policy environment needed for FDI and trade liberalization to translate into sustained economic growth.