to economic growth and development. FDI can have spillover on all firms thereby boost the productivity of the entire economy. Boyd and Smith (1992) however argued to the contrary. According to them, FDI cab affect resource allocation and growth negatively where there is price distortion, financial, trade and other forms of distortions existing prior to FDI injections. Wheeler and Mody (1992) also support the views of Boyd and Smith (1992). According to Wheeler and Mody (1992), infrastructure enhances FDI s contribution by reducing their operating costs and increasing the productivity of investments. In other word, the growth impact of FDI is not authentic but tied to certain levels of infrastructure and economic performance. Nunnenkamp and Spats (2003) however criticized the view that developing countries should draw on FDI to create economic development. They concluded that the growth impacts of FDI are ambiguous because of high
22 aggregated FDI data. By disaggregating FDI and considering the compatibility of different types of FDI on economic conditions prevailing in the host country, the positive effects of FDI are doubtful. Host country and industry characteristics as well as interplay between both sets of characteristics determine the growth impact of FDI in developing nations. 2.2 EMPIRICAL REVIEW A lot of research interest has been show on the relationship between FDI and economic growth, although most of such work is not situated in Africa. The focus of the research work on FDI and economic growth can be broadly classified into two. First, FDI is considered to have direct impact on trade through which the growth process is assured (Markussen and Vernables, 1998). Second, FDI is assumed to augment domestic capital thereby stimulating the productivity of domestic investments (Borenstzein et al., 1986; Driffield, 2001). These two arguments are in conformity with endogenous growth theories (Romer, 1990) and cross-country models on industrialization (Chenery et al., 1986) in which both the quantity and quality of factors of production as well as the transformation of the production processes are ingredient in developing a
23 competitive advantage. FDI has empirically been formed to stimulate economic growth by a number of researchers. Alfaro, et al. (2006) analyzed the role of local financial market in enabling FDI to promote growth through background linkages. They assented that to operate intermediate firms in the goods sector, the entrepreneur requires upfront capital investments. The more developed the local financial markets is, the easier it is for credit constrained firms to operate, the increase in the qualities and quantities of intermediate goods, leads to positive spillovers to the final good sector. Due to this, the financial markets ensure the backward linkages between foreign and domestic firms to turn into FDI spillovers. Their results indicate that holding foreign investment constant, financially well developed economies perform almost as twice as economies with poor financial market in terms of growth.
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