Foreign Direct Investment and Economic Growth: Evidence from Emerging and Developing Economies

Foreign Direct Investment (FDI) has become an important component of international capital flows and a significant source of external finance for emerging and developing economies. Beyond providing capital, FDI can contribute to economic development through technology transfer, employment generation, managerial knowledge, international market integration, productivity improvements, and the development of domestic industries. However, the relationship between FDI and economic growth is neither automatic nor uniform across countries. The ability of an economy to transform foreign investment into sustainable growth depends substantially on institutional quality, human capital, financial development, infrastructure, trade openness, macroeconomic stability, and domestic absorptive capacity. This paper examines the relationship between foreign direct investment and economic growth in emerging and developing economies through a systematic review and analytical synthesis of theoretical and empirical literature. It evaluates the principal channels through which FDI influences economic performance and identifies conditions that strengthen or weaken its developmental effects. The analysis indicates that FDI generally has the potential to support economic growth, particularly when investment creates productive capacity, facilitates technological diffusion, develops human capital, strengthens export competitiveness, and generates linkages with domestic enterprises. At the same time, poorly structured investment, weak institutions, limited domestic linkages, profit repatriation, environmental costs, and excessive dependence on foreign capital can restrict these benefits. The paper concludes that policymakers should move beyond maximizing the volume of FDI and focus instead on attracting high-quality, productivity-enhancing and sustainable investment that complements national development objectives.