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  • October 2004
  • Article
  • Journal of International Economics

FDI and Economic Growth: The Role of Local Financial Markets

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

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.
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About The Author

Laura Alfaro

General Management
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More from the Authors
  • Distributional Consequences of Monetary Policy Across Races: Evidence from the U.S. Credit Register By: Laura Alfaro, Ester Faia and Camelia Minoiu
  • El Salvador: Launching Bitcoin as Legal Tender By: Laura Alfaro, Carla Larangeira and Ruth Costas
  • Can Evidence-Based Information Shift Preferences Towards Trade Policy? By: Laura Alfaro, Maggie X. Chen and Davin Chor
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