Attracting FDI as a Development Strategy

Abstract: This paper is written in order to study the effects which foreign direct investment firms have on developing host countries in order to find if countries' policies to actively attract FDI are a good development strategy. In order to find how FDI effects the countries are a big set of possible effects discussed and empirically tested using firm level data from 126 different developing countries. As such, the paper discusses the issue of the effectiveness of FDI attracting policies on an as broad and inclusive base as it finds possible. The result of doing this is it finds FDI firms, through being superior to domestic firms and thereby more efficient and increasing the wage level, do likely cause an increase in economic growth in the less advanced economies; as a positive correlation between economic growth and FDI is also found. However, it is also shown FDI firms by competing out the domestic companies might have long run detrimental effects to the country's own industry. This, combined with the result showing effects likely differ depending on the country, shows caution needs to be taken in implementing FDI attracting policies. As such, the developing countries which do implement FDI attracting policies are likely to get positive effects of doing so but should watch out or they might in the end end up being worse off.