Relationship between FDI Inflows and Economic Growth : A Review

Abstract

The relationship between FDI inflows and economic growth has motivated voluminous empirical research focusing on both developed and developing countries. The literature provides conflicting results regarding the relationship between FDI inflows and economic growth. On the one hand, some researchers argue that, besides supplementing capital, Foreign Direct Investment (FDI), as a principal conduit of technology upgradation, know-how transfer and managing skills exchange, heralds the globalisation of host economies. They view FDI as an engine of economic growth and development. Other researchers argue that FDI carries various potential drawbacks including deterioration in the balance of payments as profits are repatriated, crowding-out effect in the host economy, dependence on external sources, dilution in control, destructive competition of foreign affiliates with domestic firms and loss of market to foreign firms due to weak competitive capability of the domestic firms. This study sums up the literature as well as research studies on the relationship between foreign direct investment inflows and economic growth and attempts to arrive at a meaningful conclusion.