Hyojung Kang and ICePP Director Jorge Martinez-Vazquez have released a paper called “When Does Foreign Direct Investment Lead to Inclusive Growth?” In it, they examine the conditions under which FDI can effectively lead to inclusive growth. By using a fixed effects regression with annual data for 68 countries from 1990 to 2015, they find that FDI has the most positive effect on inclusive growth when there is a sufficiently large manufacturing sector and a developed enough infrastructure base in the host country, a finding that emphasizes the critical importance of the host country’s absorptive capacity. Additionally, they find that a smaller technological or knowledge gap with the foreign firms is required for FDI to lead to more linkages and spillovers, and ultimately job creation for the poor. These results cast doubt on development strategies that rely on FDI as a sufficient policy for inclusive growth.
Read the full working paper here.
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The International Center for Public Policy has published a working paper series since 1997 to disseminate academic research quickly and to stimulate discussion that can expand knowledge, instill optimal practice and build capacity in the public sector around the world to improve human well-being.
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