NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Transition to FDI Openness: Reconciling Theory and Evidence

Ellen R. McGrattan

NBER Working Paper No. 16774
Issued in February 2011
NBER Program(s):   AP   EFG

Empirical studies quantifying the economic effects of increased foreign direct investment (FDI) have not provided conclusive evidence that they are positive, as theory predicts. This paper shows that the lack of empirical evidence is consistent with theory if countries are in transition to FDI openness. Anticipated welfare gains lead to temporary declines in domestic investment and employment. Also, growth measures miss some intangible FDI, which is expensed from company profits. The reconciliation of theory and evidence is accomplished with a multicountry dynamic general equilibrium model parameterized with data from a sample of 104 countries during 1980-2005. Although no systematic benefits of FDI openness are found, the model demonstrates that the eventual gains in growth and welfare can be huge, especially for small countries.

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A data appendix is available at http://www.nber.org/data-appendix/w16774

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Document Object Identifier (DOI): 10.3386/w16774

Published: Ellen McGrattan, 2012. "Transition to FDI Openness: Reconciling Theory and Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 437-458, October. citation courtesy of

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