The main regression results indicate that FDI has a positive overall effect on
economic growth, although the magnitude of this effect depends on the stock of
human capital available in the host economy. However, the nature of the
interaction of FDI with human capital is such that for countries with very low
levels of human capital the direct effect of FDI is negative. The cross-country
regressions also show that FDI exerts a positive, though not strong, effect on
domestic investment, presumably because the attraction of complementary activities
dominates the displacement of domestic competitors. This is an indirect
effect of FDI on growth, since it operates through ‘pulling in’ other sources of
investment. All regressions are based on panel data for the two decades 1970–79
and 1980–89, and were estimated using the seemingly unrelated regressions
technique (SUR).We do not report cross-section regressions, which basically yield
the same qualitative results as those of the panel estimation. The final sample
consists of 69 developing countries, for which data on all the variables are
available.