Boon or bane? Reassessing the productivity of foreign direct investment

We assess the effects of foreign and domestic capital on economic growth us ing the latest data and better models of economic growth than those previou sly used. We explicitly consider the role of human capital in the process o f economic development. We find no evidence that foreign direct investment harms the economic prospects of developing countries. The flow of foreign c apital from 1980 to 1991 spurred growth in gross domestic prc,duct per capi ta, while the level of foreign stock, or "foreign penetration," had 120 dis cernible effect. Indeed, new foreign investment was more productive dollar for dollar than was capital from domestic sources. Previous suggestions tha t foreign investment flows are less beneficial than domestic ones were base d on a misinterpretation. Moreover, foreign direct investment stimulates in vestment from domestic sources. Consequently, developing countries have no reason to eschew foreign capital, as dependency theorists urge.