FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN DEVELOPING COUNTRIES

Theory suggests that foreign direct investment (FDI) contributes to capital accumulation and technological progress and is an important catalyst for industrial development. In the context of an endogenous model, we investigate the impact of FDI on economic growth, and test the hypothesis that the beneficial effect of FDI inflows is stronger in those countries with higher level of economic development. Our results show a strong direct impact of FDI on economic growth in developing countries, as well as an indirect impact through the interaction of FDI with human capital. Additionally, our results suggest that the impact of FDI on economic growth is greater among technological leaders. We conclude that absorptive capacity in the host country is important in allowing FDI to positively and fully impact economi