The Role of FDI in Economic Development

Growth in foreign direct investment (FDI) is perhaps the clearest sign of globalization in the past decade. The average annual growth rate of FDI has been 23 percent since 1986, which is twice as much as that of trade. Most international investments take place within the OECD area. However, during the 1990s, and until the Asian financial crisis in 1997, the share of FDI hosted by countries in the developing world increased.1 Measured as a share of host country GDP, FDI flows to developing countries are typically greater than those to the developed world. Some people view the presence of multi-national enterprises (MNEs) in poor coun-tries as a threat to economic development. Others see FDI as a potential source of economic growth. The present paper aims at clarifying the role of FDI in economic development and derive lessons and policy implications. We base our study on general theoretical and empirical literature and o