Browsing by Author "Kajamaa, Ilona"

Foreign direct investment (FDI) is one of the key drivers of globalization. It is generally regarded as beneficial for the host countries to which FDI flows are directed. Experience has shown this to be true for developed countries, but not all developing countries have been able to benefit from inward FDI to the same extent. In addition, empirical studies exploring the effect of FDI on developing host countries have found ambiguous results. As FDI flows are increasingly directed to developing countries and transition economies, it is time to find out what the effect of FDI really is on different host countries, and why the literature has failed to provide a unanimous answer. The purpose of the thesis is to study the effect of inward FDI on developing host countries and the conditions on which the effect depends. The thesis concentrates on the effect of FDI on economic growth. It shows that the FDI-growth relationship is more complex than the literature generally suggests. There are two main themes. First, it is studied how the local conditions (i.e. the absorptive capacity of the host country) influence the effect of FDI on growth. Then, it is shown how the effect of FDI on growth depends on the type of FDI. Two endogenous growth models are presented in the thesis. The models are closely linked to the main themes. The model by Alfaro et al. (2010) focuses on the importance of the absorptive capacity of the host country, which is measured in the model by the development of local financial markets. The model introduces a mechanism through which FDI may lead to a higher growth rate in host countries and shows how the mechanism depends on the development of local financial markets. The second model is a growth model by Beugelsdijk et al. (2008), which takes into account the heterogeneity of FDI and differentiates between the growth effects of horizontal (market seeking) FDI and vertical (efficiency seeking) FDI. The varying effects of different types of FDI and the types of investment certain kinds of countries attract are discussed as well. The main conclusion of the thesis is that the absorptive capacity of the developing host country has to be good enough, so that the host country can (fully) benefit from inward FDI, especially from its growth promoting property. In particular, the local financial markets matter, which is shown in the thesis. Another important conclusion of the thesis is that the type of FDI is important, as the growth effects and the channels through which FDI affects growth are not the same for the different types of FDI. These two aspects are significant in determining the benefits from inward FDI, but they are not enough taken into account in the literature. The thesis suggests that this, at least partly, explains why current literature fails to provide a unanimous answer to the question of the effect of FDI on growth. The findings of the thesis have implications for policy and future research.