Thursday, April 25

Differential Growth Impact of FDI on LICs, LMICs, and ECs: The Role of Absorptive Capabilities

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By Pravakar Sahoo & Ranjan Kumar Dash

Working Paper No- 447

FDI has been beneficial to developing countries through increased access to capital, technology, foreign markets, superior managerial skills, and other backward and forward spillover effects. However, the developmental implications of FDI are dependent on the absorptive capabilities and levels of development. In this context, we scientifically examine the impact of FDI on economic growth for 93 developing countries for the period 2000-2017. The strength of this comprehensive study lies in the nuance that it adds to the current discussion by analyzing the differential impacts of FDI inflows across different types of developing countries such as emerging countries(ECs), lower-middle-income countries (LMICs), and low-income countries (LICs). Unlike previous studies, we investigate the particular channels through which positive spillovers from FDI are transmitted towards the growth of these different country categories. The results reveal that the beneficial impact of FDI varies across different country groups. Thus, the efficacy with which FDI positively impacts growth is contingent upon the absorptive capacities of developing countries, which in turn are determined by trade openness, stock of human capital, infrastructure, financial sector development, institutional setup, and foreign debt.

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