Foreign direct investment (FDI) is generally believed to propel economic growth in developing countries. FDI makes significant contributions to the host country’s development process especially through easing of the constraints of low levels of domestic savings and investment as well as foreign exchange shortages. It increases the gross domestic product and generates a stream of real incomes in the host country. This increased productivity benefits local income groups through higher wages and expanded employment, lower product prices paid by consumers, rent to local resource owners, and higher tax revenue or royalties to the government. Other segments of the economy also benefits through the realization of external economies. In some cases, the expanded production leads to penetration into export markets thereby increasing foreign exchange earnings for the host country. In the same way, the expanded production from the import substitution effect can lead to conservation of foreign exchange. Forward and backward linkages can also be enhanced in the economy (Obadan, 2004). Essentially, one of the greatest benefits of FDI to the recipient country is the access to foreign knowledge and technology that the investment often provides (Desai et al 2005; Obadan, 2004; Cockeroft and Ridell 1991). In the light of this, during the past decade, international business grew at a rapid pace. The impact of this expansion on economic growth has aroused great interest among scholars. The existing studies provide convincing evidence that the growth enhancing effect from FDI appears to vary from country to country and for some countries FDI can even adversely affect the growth process (Borensztein et al, 1998; Lipsey 2000). Consequently, contrary to the belief that is fast becoming a dogma in the development orthodoxy, the growth-stimulating effect of FDI is not automatic but stems from numerous country specific factors such as the trade policy regime. Similar conclusion is made by Zhang (2001) and Asiedu (2002) that a conducive environment that comes with more openness to trade is likely to attract more FDI inflows for faster growth.
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