Essays on the Effect of Foreign Investment on Growth, Productivity and Competition in Developing Countries

This thesis focuses on the effect of financial globalisation on host countries. It shows that not all forms of capital flows enhance the economic growth of developing countries. While FDI can enhance growth, portfolio equity has an insignificant effect and portfolio debt decreases growth. Although portfolio equity and portfolio debt flows have similar characteristics, the result shows they have different effect and should not be pooled together in empirical analysis. Second, this thesis provides empirical evidence on different channels through the presence of foreign firms can improve the productivity of domestic firms. The results indicate an insignificant demonstration effect, positive linkage effect and a negative competition effect. However, the magnitude of this effect depends on the structure of foreign ownership as well as the country and domestic firms' characteristics. Lastly, this thesis examines how foreign presence affects the level of competition (market power) of manufacturing firms in sub-Saharan African countries. Using markup as a proxy for market power, this study finds that on average, foreign firms do not have higher markups relative to domestic firms. In addition, this study finds that foreign presence in a sector reduces the markup of domestic firms in that sector. The effect is larger in highly concentrated sectors, low technology sectors and low-income countries. In summary, this thesis shows that not all forms of capital flows enhance the economic growth of developing countries. FDI can contribute to growth by improving firm productivity through demonstration and linkages channels. On one hand, the competition effect from foreign presence can reduce the productivity of domestic firms and can lead to exit of less productive firms. On the other hand, it will improve aggregate productivity and consumer's welfare through its effect on markup and reallocation of resources to the most productive and efficient firms.