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Foreign direct investment, technology spillovers, absorptive capability and economic growth

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Title: Foreign direct investment, technology spillovers, absorptive capability and economic growth
Author: Cao, Ling
Contributor: University of Helsinki, Department of Economics,
Thesis level: Master's thesis
Abstract: Among many possible openness and growth links, the leading contender is surely technology transfers and spillovers. This thesis aims to investigate the relationship between openness and economic growth from the perspective of Multinational companies (MNCs) and the host countries by presenting two theoretical models. The first model focuses on the pro-growth role of MNCs by showing they directly affect the endogenous growth rate via technology spillovers. The second model examines the relationship between international technology spillovers, the host countries absorptive capability and endogenous economic growth. In this thesis, I try to solve the problem how less developed countries (LDCs) grow by exploring technology spillovers. The first model is composed of two models where the first static model is based on Brainard (1993) and the latter endogenous growth model is originally from Baldwin and Forslid (2005). Knowledge capital is essential to the existence of MNCs and the equilibrium growth rate which implies that there is positive relationship between openness and economic growth is attained by Tobin s q approach. However, from the perspective of host countries, are there other host country characteristics that affect the ability of FDI to enhance the rate of economic growth? The absorptive capability model which is based on Romer (1990) R&D based model is applied and the solution to the competitive equilibrium problem shows that long-run growth arises from improvements in absorptive capability composed of human capital stocks and openness in host countries. In line with the empirical studies did by previous economists, the following results as well as policy implications are attained: 1) Countries with higher absorptive capability and human capital stocks usually have higher economic growth rates. So increasing absorptive capability or human capital stock will finally lead to a higher steady-state growth rate. It is suggested that the government should provide subsidies for individuals human capital investment, expand the government s budget on education and balance the government s expenditure on different regions. 2) Both import and FDI play an essential role in enhancing the human capital investment in host countries. FDI is a more significant spillover channel than imports which gives us the policy implication that technology policy in LDCs should focus on technology imports and imitation from outside instead of self-innovation. 3) An optimal degree of openness is also recommended for LDCs. A proper degree of openness could improve the absorptive capability, lead to more human capital investment in R&D sector and hence promote the economic growth. Therefore, the trade policy should focus on how to choose an optimal degree of openness by combining the short-term output-enhancement effect and the long-term growth effect of openness.
Description: Endast avhandlingens sammandrag. Pappersexemplaret av hela avhandlingen finns för läsesalsbruk i Statsvetenskapliga biblioteket (Unionsgatan 35). Dessa avhandlingar fjärrutlånas endast som microfiche.Abstract only. The paper copy of the whole thesis is available for reading room use at the Library of Social Sciences (Unioninkatu 35) . Microfiche copies of these theses are available for interlibrary loans.Vain tiivistelmä. Opinnäytteiden sidotut arkistokappaleet ovat luettavissa HY:n keskustakampuksen valtiotieteiden kirjastossa (Unioninkatu 35). Opinnäytteitä lainataan ainoastaan mikrokortteina kirjaston kaukopalvelun välityksellä
URI: http://hdl.handle.net/10138/16309
Date: 2009-05-11
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