Abstract/Summary

Economic development can be defined as a process in which output growth is accompanied by qualitative changes in the structures of production and employment. Can FDI affect this process? This paper looks for answers in two ways. First, it reviews the extant knowledge about the relationship between MNE activity and economic development in developing countries. Core theoretical and conceptual issues are presented and the key findings of both microeconomic (FDI linkages and spillovers) and macroeconomic (FDI-growth nexus) empirical studies are discussed. The main message of both streams of literature is that FDI has the potential to catalyse development, but actual outcomes are contingent on several factors, such as the absorptive capacity of domestic firms and the level of development of local financial markets. Second, the paper addresses the relationship between FDI and structural change more directly, in a cross-country context, using a two-step estimation approach that is consistent with both theoretical arguments and previous empirical findings which suggest that the FDI-development nexus is highly country-specific. The results confirm such heterogeneity and suggest that the interaction between the sectoral concentration of FDI and the development stage of the country plays a role in determining the development impact of FDI.