Economic growth in the presence of FDI: The perspective of newly industrialising economies

Although FDI is widely believed to have a positive effect on economic growth, the exact mechanism of how FDI impacts upon the development process of the newly industrialising economies is far from being well understood. This paper presents and tests two propositions on the role of FDI in economic growth from a newly industrialising economy's perspective. First, FDI is a mover of production efficiency because it helps reduce the gap between the actual level of production and a steady state production frontier. Second, FDI being embedded with advanced technologies and knowledge is a shifter of the host country's production frontier. Due to its dual role as a mover of production efficiency and a shifter of production frontier, FDI is a powerful driver of economic growth for a newly industrialising economy to catch up with the world's most advanced countries. China's economic success over the past decades provides an ideal example to test the hypotheses.