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Foreign Direct Investment, Finance, and Economic Development

Chapter for the Encyclopedia of International Economics and Global Trade, Forthcoming

33 Pages Posted: 1 Feb 2017  

Laura Alfaro

Harvard University - Business, Government and the International Economy Unit

Jasmina Chauvin

Harvard Business School

Date Written: September 21, 2016

Abstract

Research has sought to understand how foreign direct investment affects host economies. This paper reviews the empirical literature, specifically addressing the question: How does FDI affect economic development of host countries and what is the role of local financial markets in mediating the potential benefits? We first define FDI and discuss general theories on types and drivers of FDI. This review takes a host-country perspective rather than a firm perspective and thus only highlights the key insights from the rich firm-level literature on MNCs. We then focus on how financial conditions in host countries affect the extent of FDI-related capital inflows, shape the operations of foreign firms, and mediate the extent of productivity spillovers from FDI to local firms. The survey focuses mainly on work related to developing countries.

Suggested Citation

Alfaro, Laura and Chauvin, Jasmina, Foreign Direct Investment, Finance, and Economic Development (September 21, 2016). Chapter for the Encyclopedia of International Economics and Global Trade, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2908440

Laura Alfaro (Contact Author)

Harvard University - Business, Government and the International Economy Unit ( email )

Cambridge, MA 02138
United States

Jasmina Chauvin

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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