FDI Spillovers, Financial Markets, and Economic Development

Alfaro, Laura; Chanda, Areendam; Kalemli-Ozcan, Sebnem; Sayek, Selin

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FDI Spillovers, Financial Markets, and Economic Development

IMF Working Paper No. 03/186

33 Pages Posted: 3 Feb 2006

See all articles by Laura Alfaro

Sebnem Kalemli-Ozcan

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Koc University, Graduate School of Business

Selin Sayek

Bilkent University - Department of Economics; International Monetary Fund (IMF)

Date Written: September 2003

Abstract

This paper examines the role financial markets play in the relationship between foreign direct investment (FDI) and economic development. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company or undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI, magnifying the output effects of FDI. Empirically, we show that well-developed financial markets allow significant gains from FDI, while FDI alone plays an ambiguous role in contributing to development.

Keywords: Economic growth, financial markets, foreign direct investment

JEL Classification: F23, F36, F43

Suggested Citation: Suggested Citation

Alfaro, Laura and Chanda, Areendam and Kalemli-Ozcan, Sebnem and Sayek, Selin, FDI Spillovers, Financial Markets, and Economic Development (September 2003). IMF Working Paper No. 03/186, Available at SSRN: https://ssrn.com/abstract=880280