The relationship between FDI and economic growth remains a subject of intense debate, often referred to as "empirical ambiguity".
: Evidence for "horizontal spillovers" (benefits to local competitors) is often weak, as multinationals actively guard their technology. However, "backward linkages"—where foreign firms upgrade the capabilities of their local suppliers—show more robust positive effects. Foreign Direct Investment: Theory, Evidence and...
: Many studies find that FDI only boosts growth if the host country has reached a certain level of "absorptive capacity." Key factors include human capital (a skilled workforce), financial market development , and institutional stability . The relationship between FDI and economic growth remains
Theories explaining why firms choose to invest directly in foreign markets rather than exporting or licensing can be categorized into four main perspectives: : Many studies find that FDI only boosts
: Developed by Hymer, this posits that firms must possess unique "firm-specific advantages" (e.g., proprietary technology, brand power) to overcome the "liability of foreignness"—the inherent disadvantages of operating in a distant, unfamiliar environment.
: John Dunning’s framework suggests FDI occurs when three conditions align: O wnership (proprietary assets), L ocation (host country benefits like low costs or market size), and Internalization (the benefit of keeping operations "in-house" rather than contracting out).