Federal Reserve Bank of New York Staff Reports Financial-Sector Foreign Direct Investment and Host Countries: New and Old Lessons

Many of the lessons from foreign direct investment (FDI) research on manufacturing and extractive resource industries are applicable to FDI research on the financial sector. This paper summarizes the main findings and policy themes of FDI research, with a primary focus on the implications of FDI for host countries, especially emerging market economies. I review evidence of technology transfers, productivity spillovers, wage effects, macroeconomic growth, and fiscal and tax concerns. Throughout this paper, I stress that parallel findings often arise from studies of general FDI and studies of financial-sector FDI. I also emphasize important differences between the effects of FDI in these sectors, especially with regard to local institution building and business cycles. These differences— more so than the similarities—should be the focus of research efforts. Valuable comments were provided by participants in the Bank for International Settlements Committee on Global Financial Stability in Basel, the 2004 Allied Social Science Associations meetings in San Diego, California, and the Trinity College of Dublin Conference on Micro and Macro Perspectives on FDI. Goldberg: Research and Market Analysis Group, Federal Reserve Bank of New York (e-mail: [email protected]). The views expressed in the paper are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.