FDI and Economic Growth: The Role of Local Financial Markets

Laura  Alfaro; Areendam  Chanda; Sebnem  Kalemli-Ozcan; Selin  Sayek

Article | Journal of International Economics | October 2004

FDI and Economic Growth: The Role of Local Financial Markets

by Laura Alfaro, Areendam Chanda, Sebnem Kalemli-Ozcan and Selin Sayek

Abstract

The purpose of this paper is to examine 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 have two choices: they can work for the foreign company in the FDI sector and use their wealth to earn a return or they can choose to undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents in the economy to take advantage of knowledge spillovers from FDI. The empirical evidence suggests that FDI plays an important role in contributing to economic growth. However, the level development of local financial markets is crucial for these positive effects to be realized.

Keywords: Foreign Direct Investment; Financial Markets; Economic Growth; Cost; Wealth; Investment Return; Knowledge;

Format: Print

Find at Harvard Read Now Purchase

Citation:

Alfaro, Laura, Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek. "FDI and Economic Growth: The Role of Local Financial Markets." Journal of International Economics 64, no. 1 (October 2004): 89–112.

In the decades following 2005, China faced significant financial challenges. Inflation spiraled upwards and China’s economy stagnated in the wake of the Global Financial Crisis. The country’s leaders took an interventionist approach to weather the storm, controlling capital and exchange rates. These actions raised criticism from other nations, and in 2017 the U.S. initiated the U.S.-China Trade Wars, which enforced tariffs and requirements for increased transparency. As implications of the trade wars remained uncertain, many wondered whether the central bank would introduce further discreet steps to change the yuan. Would China’s currency appreciate as substantially against the U.S. dollar as predicted by economists? And when would further change occur? The stakes were high; a freer yuan float would impact groups within and outside of China very differently. Would China’s currency then be allowed to depreciate or appreciate if fundamentals required it?

For decades, Chile was heralded as South America’s pillar of stable economic growth. Chile was the world’s largest producer of copper and enjoyed a long period of over 30 years of world demand for its resources. In 2013, the commodity boom ended and was replaced by a slow period of economic activity. By 2019, a culmination of factors had contributed to widespread protests. Major streets in Santiago were shut down due to demonstrations by workers across 20 ports. Mining unions urged the government to lift the state of emergency and end curfews. It was unclear how these stoppages would affect copper production and prices in a country that produced a third of the world’s supply.

Faculty & Research

FDI and Economic Growth: The Role of Local Financial Markets

Abstract

Citation:

About the Author

More from the Author