How does foreign direct investment promote economic growth?
Subtitle: exploring the effects of financial markets on linkages
By: Laura Alfaro, Areendam Chanda, Sebnem Kalemli-Ozcan, Selin Sayek
Contributors: Kalemli-Ozcan, Sebnem; Chanda, Areendam; Sayek, Selin; Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 07-013; Working paper (Harvard Business School. Division of Research) -- 07-013
Publisher: Division of Research, Harvard Business School
Published: 2006
Place of publication: Boston]
Language: eng
Number of pages: 52
Description: The empirical literature finds mixed evidence on the existence of positive productivity externalities in the host country generated by foreign multinational companies. We propose a mechanism that emphasizes the role of local financial markets in enabling foreign direct investment (FDI) to promote growth through backward linkages, shedding light on this empirical ambiguity. In a small open economy, final goods production is carried out by foreign and domestic firms, which compete for skilled labor, unskilled labor, and intermediate products. To operate a firm in the intermediate goods sector, entrepreneurs must develop a new variety of intermediate good, a task that requires upfront capital investments. The more developed the local financial markets, the easier it is for credit constrained entrepreneurs to start their own firms. The increase in the number of varieties of intermediate goods leads to positive spillovers to the final goods sector. As a result financial markets allow the backward linkages between foreign and domestic firms to turn into FDI spillovers.
Notes: "August 2006"--Added t.p.

Includes bibliographical references.