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2003•Unpublished venueRequires access

FDI Spillovers, Financial Markets, and Growth

Laura Alfaro, Areendam Chanda, Ṣebnem Kalemli‐Özcan, Selin Sayek

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Abstract

This paper examines the various links among foreign direct investment, financial markets and growth. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company in the FDI sector; or they can undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI. Empirical analysis, using cross-country data between 1975-1995, shows that FDI alone plays an ambiguous role in contributing to economic growth. However, countries with well-developed financial markets gain significantly from FDI.

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What this paper is about

This paper examines the various links among foreign direct investment, financial markets and growth. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company in the FDI sector; or they can undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI. Empirical analysis, using cross-country data between 1975-1995, shows that FDI alone plays an ambiguous role in contributing to economic growth. However, countries with well-developed financial markets gain significantly from FDI.

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Available abstract

This paper examines the various links among foreign direct investment, financial markets and growth. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company in the FDI sector; or they can undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI. Empirical analysis, using cross-country data between 1975-1995, shows that FDI alone plays an ambiguous role in contributing to economic growth. However, countries with well-developed financial markets gain significantly from FDI.

Key concepts: Foreign direct investment, Financial market, Business, Work (physics), International economics, Economics, Monetary economics, Finance

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