Direct Foreign Investment, Transnational Corporations and Growth: Some Empirical Evidence and a North-South Model

This paper examines the growth effects of direct foreign investment on rich and poor countries. It first provides a brief survey of the main issues concerning direct foreign investment and growth. It then reviews results of earlier cross-country studies on the effects of direct foreign investment and foreign capital stock on the growth rate of host countries and then reexamines this issue to argue that the deleterious effects of direct foreign investment may have been exaggerated in the past. It then develops a dynamic model of North-South trade in which Northern firms invest in the South to produce a good which competes directly with the Northern good. It is shown that although the encouragement of foreign direct capital inflows into the South may increase the long-run equilibrium rate of growth of the world economy, implying that both the South and the North may grow more rapidly as a result of the liberalization of capital flows between the North and the South, this long-run equilibrium is likely to be unstable. This implies that the liberalization of direct capital flows in the South may bring about a more even pattern of international development — perhaps reversing a pattern of uneven development — and that the North may not share in the South’s prosperity. However, uneven international development cannot be ruled out either.