Foreign direct investment (FDI) is often seen as important
catalysts for economic growth in the developing countries.
FDI plays very important role in economic growth of countries
like India The relationship between Foreign Direct Investment
(FDI) and economic growth has long been a subject of great
interest in the field of international growth. In the era of volatile
flows of global capital, the stability of FDI emerges as an effective
channel to faster growth in developing countries, particularly
in relation to Least Developed Countries (LDCs).
The gains from FDI inflows are unquestionable as it contributes
to economic growth through an increase in productivity
by providing new investment, better technologies and
managerial skills to the host countries. The impact of FDI on
economic growth depends on the degree of capacity of the
host country to use FDI efficiently. Similarly, trade liberalization
may facilitate economic growth through efficiency in production
by utilizing the abundant factors of production more
effectively and absorbing better technologies from advanced
countries. On the one hand, it may harm the growth process
through various forms of macroeconomic instability such as
terms of trade deterioration and balance of payments crisis.
Therefore, it is a challenge for developing countries to find out
the appropriate direction of the role of FDI and trade liberalization
in economic growth.