Abstract
The nexus between foreign direct investment (FDI) and economic growth has been the main
focus of extensive academic research over the past few decades. This paper contributes to the
literature by investigating the effects of FDI on growth to identify the mechanism via which FDI
affect growth, and to explain the reasons that account for ambiguity of empirical findings. This
assessment was conducted through a review of available documentation. The study reveals that
FDI promotes the recipient country’s economic growth via various mechanisms: raises capital
formation of the host country, increases growth by the transfer of new technologies and
knowhow (new production processes and techniques, managerial skills, and varieties of capital
goods) and increases competition in the host country. However, the majority of empirical
investigations reveal that recipient countries need to pass a certain level of absorptive capacity
(degree of financial development, human capital development, technology gap, institutional
quality, trade openness and infrastructure development) known as development threshold, to be
able to exploit FDI more efficiently. Thus, FDI positive impact on growth is contingent on local
conditions and absorptive capacities of the host country. The study recommends that the host
country should create the enabling environment to take advantage of the benefits of FDI and put
in measures to attenuate the adverse effect of FDI on economic growth.
Keywords
- Foreign Direct Investment,
- Economic Growth,
- Mechanisms,
- Recipient Country,
- Sustainable Development
Disciplines
Publication Date
2017
Citation Information
Edmund Kwablah and Edinam K. Glover 2017. Re-Examining Foreign Direct Investment - Growth Nexus. International Journal of Economics, Commerce and Management, 5 (7): 512-531.