FDI, multinationals and structural change in developing countries
André Pineli, Rajneesh Narula & René Belderbos
#2019-004
Economic development can be defined as a process in which output growth
is accompanied by qualitative changes in the structures of production
and employment. Can FDI affect this process? This paper looks for
answers in two ways. First, it reviews the extant knowledge about the
relationship between MNE activity and economic development in developing
countries. Core theoretical and conceptual issues are presented and the
key findings of both microeconomic (FDI linkages and spillovers) and
macroeconomic (FDI-growth nexus) empirical studies are discussed. The
main message of both streams of literature is that FDI has the potential
to catalyse development, but actual outcomes are contingent on several
factors, such as the absorptive capacity of domestic firms and the level
of development of local financial markets. Second, the paper addresses
the relationship between FDI and structural change more directly, in a
cross-country context, using a two-step estimation approach that is
consistent with both theoretical arguments and previous empirical
findings which suggest that the FDI-development nexus is highly
country-specific. The results confirm such heterogeneity and suggest
that the interaction between the sectoral concentration of FDI and the
development stage of the country plays a role in determining the
development impact of FDI.
Keywords: foreign direct investment, multinational enterprises,
developing countries, economic development, structural change
JEL Classification: D62, F23, L16, O11, O14, O19, O24