Foreign Direct Investment as a Source of Endogenous Growth

Abstract

Recent research has stressed the role of technology as one of the crucial drive engines of growth. Not every country, however, has the same possibilities to access advanced technology. Many LDCs lack the necessary social infrastructure in order to innovate and must often recur to benefit from technology invented elsewhere. One of the channels whereby technology may diffuse from developed to developing countries is Foreign Direct Investment (FDI).

This paper designs and discusses a simple model in which FDI generate endogenous, non zero growth. In particular, FDI brings about growth because it facilitates the entry of intermediate goods of more advanced technology in the host country, thus increasing both domestic capital and output. In contrast, if the entrance of FDI is obstructed or precluded by policy measures in the host country, the growth rate of the latter will be smaller or even zero.

Keywords: foreign direct investment, endogenous growth, developing countries

JEL Classification: 040