Studies
of the linkage between foreign direct investment and development have produced
con-fusing and sometimes contradictory results. Some have shown that foreign
direct investment (FDI) spurs economic growth in the host countries; others
show no such effect. Some find spill-over benefits to the host economy—that is,
benefits not appropriated by investors or in the form of superior wages—while
others do not discern these benefits.
For
years, it has been unclear whether developing countries benefit from devoting
substantial resources to attracting FDI. A government authority in a developing
country might, for example, grant a subsidy to a foreign-invested project if it
believed that the project would produce positive externalities or spillovers.
These could include managerial and worker training, technological learning that
is transferred outside the firm, an increase in supplier efficiency, and
demonstration effects through which the success of one investor persuades
others to invest in the host country. Yet it has proved extremely difficult to
measure such effects.
FDI
that is integrated into the global supply network of parent multinationals
tends to be particularly potent for host country development, while FDI
oriented toward protected domestic markets and hampered by joint venture and
domestic content requirements is not beneficial.
FDI
produces different results in different host countries, the economist offers
guidance to policymakers in both developing and developed countries on ways to
ensure that FDI aids rather than impedes development: