RE-EXAMINING FOREIGN DIRECT INVESTMENT-GROWTH NEXUS
International Journal of Economics, Commerce and Management United Kingdom
The nexus between foreign direct investment (FDI) and economic growth has been the main focus of extensive academic research over the past few decades. This paper contributes to the literature by investigating the effects of FDI on growth to identify the mechanism via which FDI affect growth, and to explain the reasons that account for ambiguity of empirical findings. This assessment was conducted through a review of available documentation. The study reveals that FDI promotes the recipient
... s the recipient country's economic growth via various mechanisms: raises capital formation of the host country, increases growth by the transfer of new technologies and knowhow (new production processes and techniques, managerial skills, and varieties of capital goods) and increases competition in the host country. However, the majority of empirical investigations reveal that recipient countries need to pass a certain level of absorptive capacity (degree of financial development, human capital development, technology gap, institutional quality, trade openness and infrastructure development) known as development threshold, to be able to exploit FDI more efficiently. Thus, FDI positive impact on growth is contingent on local conditions and absorptive capacities of the host country. The study recommends that the host country should create the enabling environment to take advantage of the benefits of FDI and put in measures to attenuate the adverse effect of FDI on economic growth.