FDI and economic growth in less developed countries

Abstract

During the 1960s and 1970s, foreign direct investment (FDI) and the activities of multinational enterprises (MNEs) in less developed countries (LDCs) were generally viewed unfavourably, often being considered exploitative and as leading to worsening labour market conditions and job losses. However, there was a gradual shift in perception during the 1980s and 1990s, with increasing recognition of positive features of FDI such as technological spillovers and the increase in demand for domestic industry. Hence many countries, including LDCs, have introduced measures such as favourable tax treatment for foreign firms in order to attract FDI2. Against this background, FDI flows to LDCs have grown rapidly, increasing from 0.9 per cent of LDCs’ combined GDP in 1990 to a peak of 4.1 per cent in 1999, before declining slightly to 3.3 per cent in 2003 (World Bank, 2005). This article surveys the theoretical and empirical literature that describes the role of FDI in the economic growth of LDCs, and extracts its policy implications.