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  • 2020
  • Chapter
  • Encyclopedia of International Economics and Global Trade, Vol. 1

Foreign Direct Investment, Finance and Economic Development

By: Laura Alfaro and Jasmina Chauvin
  • Format:Print
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Abstract

Research has sought to understand how foreign direct investment affects host economies. This paper reviews the empirical literature, specifically addressing the question: How does FDI affect economic development of host countries and what is the role of local financial markets in mediating the potential benefits? We first define FDI and discuss general theories on types and drivers of FDI. This review takes a host-country perspective rather than a firm perspective and thus only highlights the key insights from the rich firm-level literature on MNCs. We then focus on how financial conditions in host countries affect the extent of FDI-related capital inflows, shape the operations of foreign firms, and mediate the extent of productivity spillovers from FDI to local firms. The survey focuses mainly on work related to developing countries.

Keywords

Foreign Direct Investment; Developing Countries and Economies; Financial Condition; Development Economics

Citation

Alfaro, Laura, and Jasmina Chauvin. "Foreign Direct Investment, Finance and Economic Development." In Encyclopedia of International Economics and Global Trade, Vol. 1: Foreign Direct Investment and the Multinational Enterprise, edited by Mariana Spatareanu, 231–258. World Scientific, 2020.
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About The Author

Laura Alfaro

General Management
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More from the Authors
  • Global Supply Chains: The Looming 'Great Reallocation' By: Laura Alfaro and Davin Chor
  • Urgent: The IMF Must Reform By: Laura Alfaro, Guillermo Calvo, José de Gregorio, Augusto de la Torre, Roque Fernandez, Pablo Guidotti, Enrique Mendoza, Ernesto Talvi, Liliana Rojas-Suarez and Andrés Velasco
  • The Real Exchange Rate, Innovation and Productivity By: Laura Alfaro, Alejandro Cuñat, Harald Fadinger and Yanping Liu
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