On the Role of Absorptive Capacity: FDI Matters to Growth

31 Pages Posted: 16 Nov 2006

See all articles by Yuko Kinoshita

Yuko Kinoshita

International Monetary Fund (IMF); University of Michigan, William Davidson Institute; Centre for Economic Policy Research (CEPR)

Chia-Hui Lu

Academia Sinica

Date Written: November 2006


The paper studies the effects of foreign direct investment (FDI) on economic growth when sufficient provisions of infrastructure is a pre-requisite. In the overlapping generations structure setting, we show that technology spillovers via FDI take place only when the host country has the sufficient level of infrastructure. Infrastructure has a subsequent positive feedback on further investment which leads the country grow faster. If infrastructure falls short of the critical level, however, then FDI has little effect on growth as the country is trapped in a low-growth equilibrium. We also present the simulations and empirical results based on panel data for 42 developing countries between 1970 and 2000. They provide support to the model that FDI and infrastructure are complements in affecting per capita GDP growth.

Keywords: foreign direct investment, economic growth, technology diffusion

JEL Classification: F21, O40, O33, H54

Suggested Citation

Kinoshita, Yuko and Lu, Chia-Hui, On the Role of Absorptive Capacity: FDI Matters to Growth (November 2006). William Davidson Institute Working Paper No. 845, Available at SSRN: https://ssrn.com/abstract=944580 or http://dx.doi.org/10.2139/ssrn.944580

Yuko Kinoshita (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
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202-623-5442 (Phone)
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University of Michigan, William Davidson Institute

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Ann Arbor, MI 48109-1234
United States

Centre for Economic Policy Research (CEPR)

United Kingdom

Chia-Hui Lu

Academia Sinica ( email )

Taipei, 11529

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