The Effect Of FDI On Economic Growth
The development theory highlights multiple ways in which FDI could add to the growth in the real income of the recipient country. First, there is the release from the binding constraint of domestic savings through foreign capital inflow. In this case, FDI augments low domestic savings in the process of capital accumulation. In such cases, FDI stimulates domestic investment and the total investment in the country is enhanced (Ajayi, 2006).
FDI produces externalities in the form of technology transfer and spillovers (Carkovic and Levine, 2002). Certainly, by bringing new knowledge and investments in physical infrastructure like roads and factories, foreign investors may help to reduce what Romer (1993) referred to as “idea gaps” and object gaps” between developed and developing countries. From this perspective, FDI may boost the productivity of all firms and not just those receiving FDI. In addition, FDI can improve overall growth by promoting competition in the domestic input market and hence force local firms
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More precisely, three main channels can be detected through which FDI affects growth. First, FDI increases capital accumulation in the receiving country by introducing new inputs and technologies. Second, it raises the level of knowledge and skills in the host country through labor and manager training Third, FDI increases competition in the host country industry by overcoming entry barriers and reducing the market power of existing
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