Foreign Investment and Development

Abstract

This article explores the impact of foreign investment on development from an organizational perspective, by examining the role of foreign subsidiaries in the economic growth of less developed countries between 1970 and 2000. Two aspects of foreign subsidiaries are considered. The first is the total number of foreign subsidiaries located in a given country. The second dimension is ‘foreign subsidiary concentration’, the percentage of foreign subsidiaries located in a given country owned by corporations headquartered in a single country. Several findings emerge from structural equation models of 41—70 less developed countries between 1970 and 2000. First, overall growth of foreign subsidiaries between 1970 and 2000 has a positive effect on economic growth in less developed countries. Second, relatively high levels of foreign subsidiary concentration in 1970 inhibit this expansion of foreign subsidiaries. Two other aspects of foreign investment, foreign investment concentration and foreign capital dominance, also retard the expansion of foreign subsidiaries. Further analyses suggest that political corruption may, in part, mediate these relationships.