The Relationship between Foreign Direct Investment and Economic Growth: A Review of the Literature (1994-2023)

Abstract

This paper presents a comprehensive review of the literature examining the relationship between Foreign Direct Investment (FDI) and economic growth from 1994 to 2023. Over the past three decades, a growing body of research has explored the channels through which FDI impacts economic growth, including technology transfer, capital accumulation, and improvements in human capital. While early studies primarily focused on the direct benefits of FDI, more recent research highlights the importance of host country characteristics, such as institutional quality, governance, and absorptive capacity, in determining the extent of FDI’s positive effects. Additionally, the role of FDI in fostering productivity, innovation, and infrastructure development has been increasingly recognized. The findings suggest a complex, context-dependent relationship, with FDI often promoting economic growth in developing and emerging economies, but not always yielding the same results in advanced economies. This review synthesizes key theoretical frameworks, empirical findings, and policy implications, offering valuable insights for policymakers seeking to harness FDI as a driver of sustainable economic development.