FDI versus R\&D in an endogenous growth model

TL;DR

This paper analyzes how FDI and R&D influence the growth trajectory of host countries, highlighting that R&D investment can lead to sustained growth while FDI's benefits are stage-dependent.

Contribution

It introduces an endogenous growth model demonstrating the differential impacts of FDI and R&D on economic development stages.

Findings

R&D investment enables sustained economic growth.

FDI benefits are limited to early development stages.

Focusing solely on FDI may cause a middle-income trap.

Abstract

We investigate the role of foreign direct investment (FDI) and research and development (R\&D) in the transitional dynamics of host countries using an optimal growth model. FDI may benefit the host country's GNP by enabling multinational enterprises to hire local workers. However, if the host country focuses solely on FDI, it may fall into a middle-income trap. Most importantly, we show that if the host country invests in R\&D, its economy can reach sustained growth. In this case, FDI benefits the host country, but only in the early stages of its development process.