Foreign direct investment as an engine for economic growth and human development: a review of the arguments and empirical evidence

Until the 1970s many developing countries – in Latin America and South-East Asia as well as Africa – were rather reluctant to accept foreign investment and pursued a policy of import substitution. But during the past three decades – mainly as a result of the structural adjustment programmes that started in the late 1970s – most developing countries have opened up their economies.1 Countries in Eastern Europe and the former Soviet Union also opened up during the process of transition from state-controlled to market economies during the 1980s and 1990s. As part of the liberalization policies, and stimulated by international donors such as the World Bank and the IMF, lowincome countries are increasingly adopting policies to attract foreign direct investment (FDI).2 Such policies are based on the belief that FDI could contribute signifi cantly to the growth and development of these nations. This chapter critically assesses the contribution FDI has made – so far – to economic growth and human development in low-income countries. We will review* This chapter was originally published as L. Colen, M. Maertens and J. Swinnen, 2009, ‘Foreign direct investment as an engine for economic growth and human development: A review of the arguments and empirical evidence’, Human Rights and International Legal Discourse 3(2) 177-227. The authors would like to thank Matthias Sant’Ana and Lode Berlage for valuable comments.