Foreign direct investment-facilitated development: the case of the natural gas industry of Trinidad and Tobago

Since the last decade, governments in less-developed countries have increasingly viewed foreign direct investment (FDI) as a catalyst for economic growth and transformation. The early literature argues that FDI-facilitated development occurs when a less-developed country assimilates, adapts and diffuses the positive externalities arising from the interaction of the multinational enterprise's (MNE) ownership advantage with its locational attributes. This paper, however, posits that FDI-facilitated development is not an effortless process. It occurs only when host developing-country governments implement intervention policies that are aimed at increasing indigenous technological capabilities. These policies enhance the absorptive capacity of host countries, allowing them to capture the spillovers arising from the MNE activities. The paper explores this for Trinidad and Tobago, a recipient of substantial FDI inflows in its natural gas industry for the last decade. It shows that FDI-facilitated development only occurs when governments in less-developed countries pursue credible intervention policies.