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2006 AEC - FDI and economic growth


In recent times, developing countries, especially in Africa see the role of foreign direct investment (referred to as FDI henceforth) as crucial to their development. FDI is seen as an engine of growth as it provides the much needed capital for investment, increases competition in the host country industries, and aids local firms to become more productive by adopting more efficient technology or by investing in human and/or physical capital. Foreign direct investment contributes to growth in a substantial manner because it is more stable than other forms of capital flows. The benefits of FDI include serving as a source of capital, employment generation, facilitating access to foreign markets, and generating both technological and efficiency spillover to local firms. It is expected that by providing access to foreign markets, transferring technology and generally building capacity in the host country firms, FDI will inevitably improve the integration of the host country into the global economy and foster growth. FDI is seen as “a key driver of economic growth and development. FDI not only boosts capital formation but also enhances the quality of capital stock”.

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