Department of Economics
Bilkent 06800 Ankara Turkey
Institutional Affiliation: Bilkent University
Information about this author at RePEc
NBER Working Papers and Publications
|September 2006||How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages|
with Laura Alfaro, Areendam Chanda, Sebnem Kalemli-Ozcan: w12522
The empirical literature finds mixed evidence on the existence of positive productivity externalities in the host country generated by foreign multinational companies. We propose a mechanism that emphasizes the role of local financial markets in enabling foreign direct investment (FDI) to promote growth through backward linkages, shedding light on this empirical ambiguity. In a small open economy, final goods production is carried out by foreign and domestic firms, which compete for skilled labor, unskilled labor, and intermediate products. To operate a firm in the intermediate goods sector, entrepreneurs must develop a new variety of intermediate good, a task that requires upfront capital investments. The more developed the local financial markets, the easier it is for credit constrained ...
Published: Alfaro, Laura, Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek. "Does Foreign Direct Investment Promote Economic Growth? Exploring the Role of Financial Markets on Linkages?" Journal of Development Economics 91, 2 (March 2010):242-256.