Foreign direct investment is no silver bullet for growth

Foreign direct investment (FDI) has long been seen as a reliable engine of economic growth, bringing jobs, productivity gains and new technologies into host economies. But new research suggests the reality is far more complex, and far less predictable.

The study, by academics from the University of East London, finds that FDI does not consistently deliver these benefits and cannot be relied on as a one-size-fits-all solution. Instead, whether it succeeds or fails depends on a combination of factors: why firms invest, the conditions in the host country, and the nature of the industry involved.

Growth depends on alignment

Drawing on more than 60 years of academic research, the study shows that the outcomes of foreign investment vary widely. In some cases, FDI supports growth and innovation. In others, it can crowd out local firms, increase inequality or lead to economic dependency. 

The findings challenge decades of economic thinking that have treated FDI as broadly beneficial. They suggest that simply attracting more foreign investment is not enough, and that the quality and context of that investment matter far more than the volume.

Do existing theories fail to explain today’s reality?

The research also highlights a deeper problem in how FDI is understood. Many existing theories, largely developed around advanced economies investing overseas, may not fully capture the complexity of today’s global investment landscape, and could fall short in explaining some aspects of current realities.

They struggle in particular to account for the growing role of companies from emerging economies, which increasingly invest overseas not just to exploit advantages, but to acquire new capabilities and compete globally.

A shift away from one-size-fits-all thinking

“What this research makes clear is that foreign direct investment has been oversimplified,” said Professor Kirk Chang of Royal Docks School of Business and Law. 

It has been treated as a kind of economic silver bullet, but our research has shown it does not reliably drive growth on its own. FDI only works when investor motives, local conditions and industry context are aligned. Without that alignment, the results are uncertain and often disappointing.”

Dr Susan Akinwalere, co-author of the study and Senior Lecturer in Business and Management, said,

For policymakers and business leaders, there is an important message. You cannot assume foreign investment will deliver benefits just because it arrives. What matters is how well it fits the country, the sector and the purpose of the investment.”

Read the paper: What can make ‘foreign direct investment’ work? Investors’ motivation, country context and industry context all play their roles