Transition to FDI Openness

Empirical studies quantifying the benefits of increased foreign direct investment (FDI) have been unable to provide conclusive evidence of a positive impact on host country’s economic performance. I show that the lack of robust evidence is not inconsistent with theory, even if the eventual gains to FDI are large, if restrictions on FDI are lifted only gradually and part of FDI is intangible investment. Anticipation of future increases in FDI can result in large shifts in patterns of domestic investment and employment. Furthermore, since intangible investments are expensed, both gross domestic product (GDP) and gross national product (GNP) are low during periods of abnormally high FDI investment. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.