The Impact Of FDI On Economic Growth

One of the most important and sensitive areas for developing countries is foreign direct investment (FDI). It is now defined as not only a simple transfer of money, but as a mixture of financial and intangible assets such as technologies, managerial capabilities, marketing skills and other assets. There is a major debate in the literature regarding the impact of FDI on economic growth. FDI is defined as an investment involving the transfer of a vast set of assets, including financial capital, advanced technology and know-how, better management practices, etc. This investment is carried out by an entity (a firm or an individual) in foreign firms, involving an important equity stake in, or effective management control (UNCTAD, 2007). Since capital

The main proponents are Hirschman (1958) and Chenery and Strout(1966). The second theory explains the effect of commodity dependence on economic growth. Main proponents are Prebisch (1950) and Singer (1950).

a) Hirschman (1958) argued that foreign capital has positive growth effects because it bridges the savings gap in developing countries. He reasoned that FDI has the ability to propel an economy on a natural growth process. The saving gap and natural growth hypothesis is also supported by the Harod-Domar growth model. It was argued that in order to grow, a country must save a significant proportion of its national income. However, if it is unable to generate savings locally, it can do so through external investment sources. This accumulation of capital would then lead to growth. Hirschman (1958) argued that FDI also brings in managerial skills and technical expertise. He maintained that local investors tended to be static, working at the same pace as the government. In this regard even though they were able to generate savings for the economy, they were not able to utilize them to stimulate further growth as they were generally apprehensive about taking on larger projects. Foreign investors on the other hand were innovative and detached from the government’s reluctance to engage in large capital projects that lead to dynamic growth. In addition, Hirschman (1958) claimed that foreign capital has the ability to maximize the potential of underutilized sectors of an economy. Hirschman (1958) however did not consider the fact that domestic investors are not generally hesitant to take on large projects, but lack the capital to do so which is a common problem in developing