Enhancing Spillovers from Foreign Direct Investment

Dirk Willem te Velde, March 2019


Public policy plays a crucial role in enhancing the spillovers from foreign direct investment (FDI). The role of FDI in driving economic growth and development has been contested at least since the 1960s. There have always been views in favour of FDI and against it. Some have argued that FDI leads to economic growth and productivity increases in the economy as a whole, and hence contributes to differences in economic growth and development performance across countries. Others have stressed the risk that FDI will destroy local capabilities, extract natural resources without adequately compensation, or introduce inappropriate technologies.

A more nuanced view on FDI and development is emerging in the research community but this has yet to be embraced fully by the policy community. The impact of FDI on economic growth is not only positive or only negative, but depends on the type of FDI, firm characteristics, economic conditions, policies and institutions. Moreover, the effect of FDI is not static, but involves a dynamic process that includes knowledge ‘spillovers’ from FDI to the local economy over time. And, crucially, policies and institutions can affect the impact of FDI, including the extent and impact of spillovers.

This paper aims to provide insights for policy-makers concerned with FDI spillovers by reviewing the empirical literature in a policy relevant way.

Photo: Instructors checking a newly made shirt at the Savar Export Processing Zone in Dhaka, Bangladesh, 2016. Dominic Chavez/ World Bank. CC BY-NC-ND 2.0