《《Foreign Direct Investment and Growth》.pdfVIP

Foreign Direct Investment and Growth: Does the Sector Matter? * Laura Alfaro Harvard Business School April 2003 Abstract Although it may seem natural to argue that foreign direct investment (FDI) can convey great advantages to host countries, this paper shows that the benefits of FDI vary greatly across sectors by examining the effect of foreign direct investment on growth in the primary, manufacturing, and services sectors. An empirical analysis using cross-country data for the period 1981-1999 suggests that total FDI exerts an ambiguous effect on growth. Foreign direct investments in the primary sector, however, tend to have a negative effect on growth, while investment in manufacturing a positive one. Evidence from the service sector is ambiguous. Key words: Foreign Direct Investment, economic growth, primary sector, manufacturing sector, service sector, spillovers. JEL Classification: F23, F36, F43 ____________________ * Harvard Business School, Morgan 263, Boston, MA 02163. Tel: 617-495-7981. Fax: 617-496-5985. E-mail: lalfaro@hbs.edu. I would like to thank Esteban Clavell for superb research assistance. 1. Introduction Many policy makers and academics contend that foreign direct investment (FDI) can have important positive effects on a host country’s development effort.1 In addition to the direct capital financing it supplies, FDI can be a source of valuable technology and know-how while fostering linkages with local firms, which can help jumpstart an economy. Based on these arguments, industrialized and developing countries have offered incentives to