Foreign Direct Investment Affects Economic Growth

Foreign Direct Investment affects economic growth

An important distinction we need to note is the effect of FDI on macroeconomy and microeconomy separately. There are studies which show that FDI has a positive effect on a host country’s macroeconomic growth but a negative effect on microeconomic growth (Hermes & Lensink, 2003). Another important thing to note is the rate at which FDI affects economic growth and what factors contribute to this rate. These factors could be anything from human capital provided by the host country, technology advancement and the level at which it was shared between etc.

There are 2 types of FDI, horizontal and vertical ("Foreign Direct Investment (Brownfield, Greenfield): Types of FDI", 2019). When a company merges with another company in a foreign country to acquire some market share it is called horizontal FDI. When a company merges, acquires or gets a part of the company to become part of the supply chain it is called vertical FDI. In both cases, the flow of investment helps in the economic growth in the foreign country.

References

Hermes, N., & Lensink, R. (2003). Foreign direct investment, financial development and economic growth. The Journal of Development Studies, 40(1), 142-163.

Carkovic, M., & Levine, R. (2005). Does foreign direct investment accelerate economic growth?. Does foreign direct investment promote development, 195.

Borensztein, E.R., Gregorio, J.D., & Lee, J. (1995). How Does for-eign Direct Investment Affect Economic Growth.

Foreign Direct Investment (Brownfield, Greenfield): Types of FDI. (2019, May 07). Retrieved from https://www.wallstreetmojo.com/foreign-direct-investment/

Population size affects economic growth

The relationship between population and economic growth is more complicated than other factors (Peterson, 2017). Peterson concludes in his research that low population growth in high income countries and high population growth in low income countries can be both detrimental on economic growth. However, population growth in high income countries can actually be quite positive in terms of economic growth.