An analysis of the impact of FDI in developing countries based on preconditions, absorptive capacity and benefits

Abstract

The growth of FDI inflow to developing countries is increasing, so have the questions of why some developing countries have succeeded in attracting and absorbing FDI benefits. These countries are seen to have found the right fit between the FDI attraction and the developmental agenda. Profound questions about the true value of FDI to host countries are addressed in this study. While FDI attraction may be justified on the basis of FDI benefits by foreign firms, it still remains critical to establish whether these benefits are automatic. As an attempt to answer these questions, this dissertation uses both firm level and country level data to investigate the effects of foreign direct investment (FDI) on developing countries.Interesting findings emerge from this study. The findings are in form of an interrelated structure setting, the study showed that technology, skills transfer and employment benefits via FDI take place only when the host country has the sufficient level of human capital, infrastructure and good local firms. And that the country must have stable political environment, consistent macroeconomic policy and good institutions in order to continue attracting FDI.