The Long‐Term Effects of Foreign Investment Dependence on Economic Growth, 1940–1990

Does dependence of a national economy on foreign investment promote economic growth or underdevelopment? The recent exchanges between Glenn Firebaugh and William J. Dixon and Terry Boswell suggest the contentious nature of this debate. This study analyzes models similar to those tested in previous research but with data from earlier time points to examine the long‐term effects of foreign capital penetration. Accumulated stocks of foreign capital/GDP in 1938 have a short‐term (five‐year) positive effect on economic growth followed by a 20‐year lagged negative effect on economic growth beginning in 1960 and lasting at least 30 years. Similar effects are found using a second indicator of foreign investment dependence, debits on investment income, for the 1950–90 period.The international migration of capital has facilitated development of the world's natural resources and has been instrumental in transmitting the direct effects of the industrial revolution from area to area. Thereby it has helped to increase the quantities and varieties of goods and services generally available and has raised living standards for some or most of the world's populations. (Cleona Lewis, Debtor and Creditor Countries, 1948)Following an initial growth spurt this (foreign investment) will create an industrial structure in which monopoly is predominant, labor is insufficiently absorbed, and there is underutiliza‐tion of the productive forces. Thus, the peripheral countries that adopt this path of uneven development based on income inequality and foreign capital imports will experience economic stagnation, under‐ and unemployment, and increasing margin‐alization of the population relative to countries that are less