What benefits do proponents expect a country to reap from FDI inflows? Because it embodies technology and know-how as well as foreign capital, FDI can benefit host economies through knowledge spillovers as well as linkages between foreign and domestic firms.
The evolution of the literature on FDI, an overview which reveals two recent trends to be of particular importance. One is the recognition that benefits generated by FDI are not exogenous, but rather conditional on the presence of complementary policies and conditions by which such benefits are facilitated and absorbed. The other is the effort to understand the mechanisms through which FDI affects growth, in particular the linkages generated between foreign and domestic firms.
Macro-level studies typically offer a better understanding of the role of local conditions in eliciting positive benefits from FDI to materialize, but they continue to be limited by identification issues or the very plausible possibility that growth might itself spawn more FDI. This potentially endogenous relationship implies that any estimates are likely to overstate the positive impact of foreign investment on growth. Microlevel studies can avoid such identification issues, but available firm-level datasets tend to cover specific and quite different types of countries and are very rarely available in developing countries, thus making it difficult to understand the role of country-specific conditions across different time periods. Furthermore, measurement issues plague measures of inputs and outputs, which can bias results.
What benefits do proponents expect a country to reap from FDI inflows? Because it embodies technology and know-how as well as foreign capital, FDI can benefit host economies through knowledge spillovers as well as linkages between foreign and domestic firms.The evolution of the literature on FDI, an overview which reveals two recent trends to be of particular importance. One is the recognition that benefits generated by FDI are not exogenous, but rather conditional on the presence of complementary policies and conditions by which such benefits are facilitated and absorbed. The other is the effort to understand the mechanisms through which FDI affects growth, in particular the linkages generated between foreign and domestic firms.Macro-level studies typically offer a better understanding of the role of local conditions in eliciting positive benefits from FDI to materialize, but they continue to be limited by identification issues or the very plausible possibility that growth might itself spawn more FDI. This potentially endogenous relationship implies that any estimates are likely to overstate the positive impact of foreign investment on growth. Microlevel studies can avoid such identification issues, but available firm-level datasets tend to cover specific and quite different types of countries and are very rarely available in developing countries, thus making it difficult to understand the role of country-specific conditions across different time periods. Furthermore, measurement issues plague measures of inputs and outputs, which can bias results.
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