THE EFFECTS OF FOREIGN DIRECT INVESTMENT ON THE HOST COUNTRY'S ECONOMIC GROWTH: THEORY AND EMPIRICAL EVIDENCE

Abstract

Foreign direct investment (FDI) influences host country's economic growth through several channels. Empirically, a variety of studies considers that FDI generate economic growth but others conclude that FDI is a source of negative effects. By reviewing existing theoretical and empirical literature, we intend to shed light on the main explanations for the mixed results. The main conclusion is that the effects of FDI on economic growth depend on the domestic conditions of the host country (e.g., human capital, economic and technological conditions, degree of openness of its economy). Thus, the host countries governments have a key role in creating the conditions that allow for the leverage of the positive effects or for the reduction of the negative effects of FDI on the host country's economic growth.