Growth Effects of Foreign Direct Investment: What Role for Liberalisation and Absorptive Capacity?

this paper aims to contribute to the ongoing debate over the role of host country factors in conditioning the growth effects of foreign direct investment (FDI). Within a general cross-country growth empirics framework, a newly compiled dataset is used to test the hypothesis that countries which adopt a liberal approach to the regulation of FDI benefit more from a given flow of foreign investment. As an extension, the relevance of trade policies and investments in human capital is also considered in conjunction with investment policies. The results suggest investment policies are directly relevant with a stronger relationship between FDI and growth observed for countries that adopt more liberal FDI policies. There is also some evidence of complementarity between liberal investment polices and openness to trade in enhancing the growth effects of FDI. However, the impact of the interaction between investment policies and human capital is less clear. 1 I thank my supervisors, Professors Prema-Chandra Athukorala, Steve Dowrick and George Fane for ongoing guidance and assistance. Working draft only, please do not quote. Any comments or suggestions would be welcome, email [email protected].