The Contribution of FDI Flows to Domestic Investment in Capacity, and Vice Versa

Assaf Razin

in Growth and Productivity in East Asia

Published by University of Chicago Press

Published in print August 2004 | ISBN: 9780226386805
Published online February 2013 | e-ISBN: 9780226387079 | DOI:
The Contribution of FDI Flows to Domestic Investment in Capacity, and Vice Versa

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The term “foreign direct investment” (FDI) usually brings to mind a significant contribution of FDI to domestic investment and capital inflows. However, there has been a lot of skepticism concerning the contribution of FDI to these engines of growth. FDI (the purchase by a domestic resident of a controlling stake in a foreign company) actually requires neither capital flows nor investment in capacity. Conceptually, FDI is an extension of corporate control over international boundaries. Theories of FDI can essentially be divided into two categories: micro (industrial organization) theories and macro finance (capital costs) theories. The early literature that explains FDI in microeconomic terms focuses on market imperfections and on the desire of multinational corporations to expand their market power. This chapter shows that FDI flows play an important role in the skimming of high-productivity investment projects and thereby contribute significantly to domestic investment in both the quantity and the quality dimensions. Using an econometric approach, it estimates the interactions between domestic investment, FDI flows, international loans, and international portfolio investment.

Keywords: foreign direct investment; domestic investment; capital flows; international loans; international portfolio investment; industrial organization; capital costs

Chapter.  7743 words.  Illustrated.

Subjects: Business and Management

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