Determinants and effects of foreign direct investment in developing countries: Theoretical and empirical analysis

Foreign Direct investment (FDI) continues to be the largest net source of external private capital for developing economies. In 1999, net flows of direct investment to developing economies continued to increase although at a much slower pace of growth than in the early 1990s. Direct investment's resilience in the face of sharp contraction of other private sources has been a stabilizing factor in financial flows to these economies since the onset of the financial crisis in 1997. Determinants like financial and corporate restructuring, large scale privatization of state-supported industries and liberalization of trade regimes in developing economies generated new opportunities for investment. Many of these investments took the form of cross-border mergers and acquisitions. In contrast to the early 1990s, there was little investment in "greenfield" projects, owing to excess capacity in many industries.; Chapter two constructs a theoretical model of foreign direct investment (FDI) and examines if trade openness and the level of infrastructural development in a country interact insofar as the attraction of FDI in concerned. Chapter three tests the predictions of the model constructed in chapter two empirically. A number of determinants are taken as control variables.; Efforts have been made to asses the contribution of foreign direct investment to economic growth and development in general. Growth can come about through an expansion of inputs; labor and capital or through more productive use of these inputs. Yet the expansion in the labor force and the additions to the capital stock alone cannot be relied upon to produce higher sustainable growth, for after a point it can be expected that diminishing returns will set in. Chapter four examines the contribution of FDI to economic growth in particular it investigates if foreign direct investment (FDI) and the level of infrastructural development in a country interact insofar as the process of economic growth is concerned. Chapter five concludes this dissertation.