Transition to FDI Openness: Reconciling Theory and Evidence

46 Pages Posted: 14 Feb 2011

See all articles by Ellen R. McGrattan

Ellen R. McGrattan

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities; National Bureau of Economic Research (NBER)

Date Written: February 2011

Abstract

Empirical studies quantifying the economic effects of increased foreign direct investment (FDI) have not provided conclusive evidence that they are positive, as theory predicts. This paper shows that the lack of empirical evidence is consistent with theory if countries are in transition to FDI openness. Anticipated welfare gains lead to temporary declines in domestic investment and employment. Also, growth measures miss some intangible FDI, which is expensed from company profits. The reconciliation of theory and evidence is accomplished with a multicountry dynamic general equilibrium model parameterized with data from a sample of 104 countries during 1980-2005. Although no systematic benefits of FDI openness are found, the model demonstrates that the eventual gains in growth and welfare can be huge, especially for small countries.

Suggested Citation

McGrattan, Ellen R., Transition to FDI Openness: Reconciling Theory and Evidence (February 2011). NBER Working Paper No. w16774, Available at SSRN: https://ssrn.com/abstract=1759846

Ellen R. McGrattan (Contact Author)

Federal Reserve Bank of Minneapolis - Research Department ( email )

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University of Minnesota - Twin Cities

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National Bureau of Economic Research (NBER)

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