Cross-National Evidence of the Effects of Foreign Investment and Aid on Economic Growth and Inequality: A Survey of Findings and a Reanalysis

Abstract

As an outgrowth of dependency theories of national development, there have been a large number of cross-national empirical studies of the effects of foreign investment and aid on economic growth and inequality. This paper reviews these studies in order to discover what can be concluded about these relationships. Our strategy is as follows: First, we discuss the conceptualization of the four main variables at issue. Second, we discuss the differences in the research designs and measuments in the studies. Third, we compare their results and explain contradictory and inconsistent findings. Fourth, we present some new analyses based on this review. We conclude: (1) The effect of direct foreign investment and aid has been to increase economic inequality within countries. (2) Flows of direct foreing investment and aid have had a short-term effect of increasing the relative rate of economic growth of countries. (3) Stocks of direct foreign investment and aid have had the cumulative, long-term effect of decreasing the relative rate of economic growth of countries. (4) This relationship has been conditional on the level of development of countries. The stocks of foreign investment and aid have had negative effects in both richer and poorer developing countries, but the effect is much stronger within the richer than the poorer ones. (5) These relationships hold independently of geographical area.