How Does Foreign Direct Investment Affect Economic Growth

IMF Working Papers, September 1, 1994

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Study tests the effect of foreign direct investment (FDI) on economic growth in a cross-country regression framework.
Utilizes data on FDI flows from industrial countries to 69 developing countries over the last two decades.
Key result: FDI is an important vehicle for the transfer of technology and contributes relatively more to growth than domestic investment.
Conditional result: The higher productivity of FDI holds only when the host country has a minimum threshold stock of human capital.
Additional result: FDI increases total investment in the economy more than one for one, suggesting the predominance of complementarity effects with domestic firms.

FDI contributes relatively more to economic growth than domestic investment.
The productivity advantage of FDI is contingent on a minimum threshold stock of human capital in the host country.
FDI raises total investment in the economy by more than a one-for-one amount, indicating complementarity with domestic firms rather than crowding out.

Host countries should develop and maintain a minimum threshold stock of human capital to fully capture the technology transfer and productivity benefits of FDI.
Policies that enhance complementarity between foreign and domestic firms could amplify the investment-raising effects of FDI.