FDI and Economic Growth in Developing Countries: The Growth Effects of Vertical, Horizontal and Export-platform FDI.

ONE OF THE MOST IMPORTANT QUESTION IN ECONOMICS IS “WHAT DETERMINES ECONOMIC GROWTH?”. IN THEORY THERE IS A LOT OF SUPPORT FOR THE FDI LED TO ECONOMIC GROWTH HYPOTHESIS. IT IS THEREFORE NOT SURPRISING THAT GOVERNMENTS ARE PREPARED TO GIVE FOREIGN FIRMS GENEROUS INCENTIVE PACKAGES. THE QUESTION IS WHETHER THIS IS JUSTIFIABLE SINCE EMPIRICAL EVIDENCES SHOW THAT THE RELATIONSHIP BETWEEN FDI AND GROWTH IS STILL AMBIGUOUS, BOTH AT MICROECONOMIC AND MACROECONOMIC LEVEL. THIS PAPER ARGUES THAT THE GROWTH EFFECTS OF FDI DEPENDS ON THE DIFFERENT TYPES/NATURE OF INVESTMENT. USING US FOREIGN AFFILIATES SALES DATA, THIS STUDY HAS BEEN ABLE TO DISTINGUISH BETWEEN THREE MAIN TYPES OF FDI STOCKS, NAMELY, HORIZONTAL, VERTICAL AND EXPORT-PLATFORM FDI RESPECTIVELY. WITH DATA FROM 20 DEVELOPING COUNTRIES FOR THE PERIOD OF 1985 TO 2005 AND APPLYING BOTH CROSS-SECTION AND PANEL DATA ANALYSIS, RESULTS INDEED INDICATE THAT THERE ARE GROWTH EFFECTS DIFFERENCES BETWEEN THE THREE MAIN TYPES OF FDI. MOST NOTICEABLE IS THAT THE RESOURCE-SEEKING NATURE OF VERTICAL FDI SHOWS A ROBUST, NEGATIVE SIGNIFICANT GROWTH EFFECT. HORIZONTAL FDI ALSO SHOWS A NEGATIVE SIGN, BUT INSIGNIFICANT. THE RELATIONSHIP OF EXPORT-PLATFORM FDI AND ECONOMIC GROWTH ARE AMBIGUOUS. ALL THIS SUGGEST THAT RESOURCES AND SPECIAL INCENTIVE PACKAGES SHOULD NOT BE GIVEN TO ALL TYPES OF FDI. INSTEAD POLICYMAKERS SHOULD SCREEN PROJECTS FOR THEIR BENEFITS, IF POSSIBLE AND SIMULTANEOUSLY INVEST MORE IN THE DEVELOPMENT OF LOCAL FIRMS AND WORKERS. THESE RECOMMENDATIONS MAY BE TOO AMBIGUOUS FOR DEVELOPING COUNTRIES WITH LITTLE RESOURCES AND WEAK INSTITUTIONS.