This paper examines the various links among foreign
direct investment, financial markets and growth. We
model an economy with a continuum of agents indexed
by their level of ability. Agents can either work for
the foreign company in the FDI sector; or they can undertake
entrepreneurial activities, which are subject to a fixed
cost. Better financial markets allow agents to take
advantage of knowledge spillovers from FDI. Empirical
analysis, using cross-country data between 1975-1995,
shows that FDI alone plays an ambiguous role in contributing
to economic growth. However, countries with well-developed
financial markets gain significantly from FDI.
Key words: Foreign direct investment,
financial markets, economic growth.
JEL Classification: F23, F36, F43
BGIE
39 pages
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