Foreign Direct Investment: Theory, Evidence And... -

: Many studies find that FDI only boosts growth if the host country has reached a certain level of "absorptive capacity." Key factors include human capital (a skilled workforce), financial market development , and institutional stability .

Foreign Direct Investment (FDI) is a cornerstone of the global economy, serving as a primary vehicle for capital, technology, and management expertise to cross borders. While often viewed as a catalyst for growth, its actual impact is shaped by a complex interplay of theoretical motives and varying empirical evidence. 1. Theoretical Frameworks

The relationship between FDI and economic growth remains a subject of intense debate, often referred to as "empirical ambiguity". Foreign Direct Investment: Theory, Evidence and...

: Evidence for "horizontal spillovers" (benefits to local competitors) is often weak, as multinationals actively guard their technology. However, "backward linkages"—where foreign firms upgrade the capabilities of their local suppliers—show more robust positive effects.

: Raymond Vernon argued that products go through stages—innovation, maturation, and standardization. As a product matures and production becomes standardized, firms move facilities to lower-cost countries to stay competitive. 2. Empirical Evidence on Economic Impact : Many studies find that FDI only boosts

In practice, the landscape for FDI is rapidly shifting due to geopolitical and technological changes.

: John Dunning’s framework suggests FDI occurs when three conditions align: O wnership (proprietary assets), L ocation (host country benefits like low costs or market size), and Internalization (the benefit of keeping operations "in-house" rather than contracting out). as multinationals actively guard their technology.

Theories explaining why firms choose to invest directly in foreign markets rather than exporting or licensing can be categorized into four main perspectives: