The Role of Foreign Direct Investment in Emerging Economies

Abstract

This research examines the role of foreign direct investment (FDI) in driving economic development across emerging economies, employing a mixed-methods approach that integrates econometric analysis with qualitative insights from policy documents and interviews. Using panel data from 2010–2023 and applying fixed effects, generalized method of moments (GMM), and difference-in-differences (DiD) estimations, the study finds that FDI inflows have a positive and significant impact on GDP growth, labor productivity, and employment generation, though the magnitude of these effects varies across regions and sectors. Results indicate that service- and technology-based investments generate stronger spillovers compared to extractive industries, while institutional quality, human capital, and policy credibility are critical in enhancing absorptive capacity. Evidence further suggests that policy reforms aimed at investment facilitation and governance improvement significantly amplify the developmental impact of FDI. Complementary qualitative findings highlight that local linkage creation, skills development, and regulatory predictability are central to translating FDI projects into sustained economic transformation. At the same time, challenges remain, including risks of inequality, environmental stress, and uneven sectoral benefits, particularly in countries with weaker governance. The study concludes that while FDI is a vital source of growth and structural upgrading, its benefits are conditional and require coherent strategies that align investment with inclusive and sustainable development objectives. By strengthening institutional frameworks, investing in human capital, and targeting strategic sectors, emerging economies can maximize the long-term gains of FDI in a rapidly evolving global economic environment.