FDI, banking crisis and growth: direct and spill over effects

TL;DR

This paper introduces a new way to analyze how Foreign Direct Investment (FDI) impacts long-term growth in developing countries, highlighting both direct benefits and indirect effects through banking crisis mitigation.

Contribution

It provides a novel decomposition of FDI's effects, showing how FDI not only boosts growth directly but also reduces banking crises and their negative impact.

Findings

FDI has a positive direct effect on growth.

FDI reduces the recessionary impact of banking crises.

FDI decreases the likelihood of banking crises.

Abstract

This study suggests a new decomposition of the effect of Foreign Direct Investment (FDI) on long-term growth in developing countries. It reveals that FDI not only have a positive direct effect on growth, but also increase the latter by reducing the recessionary effect resulting from a banking crisis. Even more, they reduce its occurrence. JEL: F65, F36, G01, G15