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When does foreign direct investment lead to inclusive growth?

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  • Hyojung Kang
  • Jorge Martinez‐Vazquez

Abstract

Foreign direct investment (FDI) is widely considered among the most effective instruments for the promotion of economic development. However, not all FDI leads to inclusive economic growth, lifting the welfare of the poorest groups. This paper examines the conditions under which FDI can effectively lead to inclusive growth. By using a fixed effects regression with annual data for 67 countries from 1990 to 2015, we find that FDI has a positive effect on inclusive growth when there is a sufficiently large manufacturing sector and infrastructure base in the host country. We also indirectly find that FDI has a positive effect on inclusive growth when the host country has a large service sector. These not very optimistic results emphasise the critical importance of the host country's absorptive capacity. A smaller technological or knowledge gap with the foreign firms is required for FDI to lead to more linkages and spillovers and ultimately job creation for the poor. The results cast doubt on development strategies that rely on FDI as a sufficient policy for inclusive growth.

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  • Hyojung Kang & Jorge Martinez‐Vazquez, 2022. "When does foreign direct investment lead to inclusive growth?," The World Economy, Wiley Blackwell, vol. 45(8), pages 2394-2427, August.
    • Handle: RePEc:bla:worlde:v:45:y:2022:i:8:p:2394-2427
    DOI: 10.1111/twec.13236
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    3. Khady DIAW & Ndiack FALL, 2022. "Effets de l’inclusion financière sur la croissance inclusive dans les pays de l’Union Economique et Monétaire Ouest Africaine (UEMOA)," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 13(2), pages 56-76, December.
    4. Emeka Nkoro & Aham Kelvin Uko, 2022. "Foreign Direct Investment and Inclusive Growth: The Role of the Financial Sector Development," International Journal of Economic Sciences, European Research Center, vol. 11(2), pages 144-162, November.
    5. Firat Emir & Edmund Ntom Udemba & Nazakat-Ullah Khan & Sadam Hussain, 2024. "Interactions among technological innovation, foreign direct investment, and agriculture: A symmetric and asymmetric study of inclusive sustainable development," Energy & Environment, , vol. 35(2), pages 1031-1049, March.
    6. John Abdulai Jinapor & Joshua Yindenaba Abor & Michael Graham, 2024. "FDI, industrialisation and environmental quality in SSA—the role of institutional quality towards environmental sustainability," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-15, December.
    7. Dwumfour, Richard Adjei & Pan, Lei & Harris, Mark N., 2023. "FDI and development redux: Is R&D a substitute for FDIs?," MPRA Paper 116117, University Library of Munich, Germany.

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