The Relationship Between FDI And Economic Growth: Modernization And Economic Growth

There are two approaches to analyze the relationship between FDI and economic growth: modernization and dependency theories. Modernization theories suggest that FDI can enhance economic growth in developing countries through the transfer of technology. This is important for developing countries since they lack the necessary infrastructure, free markets, social and economic stability, and an educated population able to develop such technology independently. Not only does FDI help to transfer technology but it also represents a flow in managerial and organizational skills. So, we can conclude that FDI plays a massive rule in promoting total factor productivity and accumulating capital \citep{adams2009foreign}. Conversely, dependency theorists,

\cite{agosin2000foreign} examined whether FDI inflows crowed out or crowed in domestic industries in three regions, namely Asia, Africa and Latin America, between 1970 and 1996. They found FDI stimulated domestic investments in Asia and Latin America, while in Africa the effect was neutral. The positive effect of FDI on domestic firms depended mainly on the ability of the government to select and encourage foreign investments that do not compete with domestic firms and have significant impacts on technology transfer. It also was reliant on the ability of the government to encourage foreign investments that engage with domestic firms

The first category argues that FDI can stimulate economic growth based on its role in technology spillover, improving competitiveness of domestic firms, developing human capital, and so forth. The second category supports the adverse impacts of FDI on economic growth based on the argument that FDI leads to the crowding out domestic investments, increase of current account deficits, and exploitation of raw materials and natural resources without adding considerable