Working Paper: NBER ID: w16774
Authors: Ellen R. McGrattan
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.
Keywords: Foreign Direct Investment; Economic Growth; Welfare Gains; Dynamic General Equilibrium
JEL Codes: E01; E2; F21; F23; F36; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FDI openness (F23) | GDP (E20) |
| FDI openness (F23) | employment (J68) |
| relaxation of FDI restrictions (F21) | GDP (E20) |
| relaxation of FDI restrictions (F21) | employment (J68) |
| anticipated welfare gains from FDI (F23) | domestic investment (E22) |
| anticipated welfare gains from FDI (F23) | employment (J68) |
| increased consumption and leisure expectations (D12) | GDP (E20) |
| increased consumption and leisure expectations (D12) | employment (J68) |
| increased FDI (F23) | intangible investments (E22) |
| intangible investments (E22) | measured GDP (E20) |
| FDI investment (F21) | host country GDP (O57) |