FDI Spillovers, Financial Markets, and Economic Development

33 Pages Posted: 3 Feb 2006

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Areendam Chanda

Louisiana State University, Baton Rouge - Department of Economics

Sebnem Kalemli-Ozcan

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Koc University, Graduate School of Business

Selin Sayek

Bilkent University - Department of Economics; International Monetary Fund (IMF)

Date Written: September 2003

Abstract

This paper examines the role financial markets play in the relationship between foreign direct investment (FDI) and economic development. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company or undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI, magnifying the output effects of FDI. Empirically, we show that well-developed financial markets allow significant gains from FDI, while FDI alone plays an ambiguous role in contributing to development.

Keywords: Economic growth, financial markets, foreign direct investment

JEL Classification: F23, F36, F43

Suggested Citation

Alfaro, Laura and Chanda, Areendam and Kalemli-Ozcan, Sebnem and Sayek, Selin, FDI Spillovers, Financial Markets, and Economic Development (September 2003). IMF Working Paper No. 03/186, Available at SSRN: https://ssrn.com/abstract=880280

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Areendam Chanda

Louisiana State University, Baton Rouge - Department of Economics ( email )

Department of economics
Baton Rouge, LA 70803-6308
United States
225-578-3791 (Phone)

Sebnem Kalemli-Ozcan

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Koc University, Graduate School of Business ( email )

Rumelifeneri Yolu
34450 Sar?yer
Istanbul, 34450
Turkey

Selin Sayek

Bilkent University - Department of Economics ( email )

06533 Ankara
Turkey
+90 312 290 1406 (Phone)

HOME PAGE: http://www.bilkent.edu.tr/~sayek/

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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