Williams, Kevin
(2010)
Essays on FDI, growth, and political instability in developing countries.
PhD thesis, University of Nottingham.
Abstract
Foreign direct investment (FDI) plays an important role in development strategies in developing countries. In particular, policy makers in developing countries and development agencies alike believe that FDI is growth enhancing, as suggested by their policy stand (in particular, promoting measures to facilitate and attract FDI). FDI is different from other types of capital flows as it involves not only the capital itself, but also transfers in the form of technology diffusion and skills, managerial expertise and know-how, and the introduction of new processing methods (Rodrik and Subramanian, 2008). These serve to modernize the recipient economy and support productivity gains, which in turn are expected to improve growth performance.
The evidence of this thesis suggests that the flow of FDI in developing countries is likely to be affected by high debt, high inflation, and constraints on the executive (XCONST), market size and good infrastructure quality. However, the flow of FDI in Latin America and the Caribbean (LAC) is affected differently: infrastructure is more important (relative to developing countries) for the type of FDI attracted to LAC. The impact of FDI on growth is direct i.e. not conditional on other country characteristics, contrary to Alfaro et al. (2004), Hermes and Lensink (2003), and Borensztein et al. (1998) that argue that the effect of FDI on growth is conditional. However, LAC can boost economic growth by investing in human capital development, as FDI does not induce growth directly in LAC.
FDI and growth are endogenously related, and the effect is bidirectional: from FDI to growth and from growth to FDI. Political instability affects growth, but the effect depends on the dimensions of political instability and appears to vary for different regions: instability of the regime and protest affect growth, while violence doesn’t appear to affect either growth or FDI, and the higher incidence of political instability in SSA affects growth differently in SSA relative to developing countries.
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