FDI versus R\&D in an endogenous growth model

Paper: arXiv 2501.12010

Authors: Thanh Tam Nguyen-Huu, Ngoc-Sang Pham

Abstract

We investigate the role of foreign direct investment (FDI) and research and development (R&D) in the transitional dynamics of host countries using an optimal growth model. FDI may benefit the host country’s GNP by enabling multinational enterprises to hire local workers. However, if the host country focuses solely on FDI, it may fall into a middle-income trap. Most importantly, we show that if the host country invests in R&D, its economy can reach sustained growth. In this case, FDI benefits the host country, but only in the early stages of its development process.

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 1.5/10
• Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides a rigorous mathematical framework utilizing optimal endogenous growth models to analyze the transitional dynamics of FDI and R&D. However, it is purely theoretical with no empirical data analysis or backtesting, which restricts its empirical rigor.

Research Flowchart

  flowchart TD
    A[Research Goal: Analyze FDI vs. R&D in Host Country Growth Dynamics] --> B[Model Setup: Optimal Endogenous Growth Model]
    B --> C[Inputs: Labor Supply, Foreign Capital/FDI, R&D Investment]
    C --> D[Dynamic Optimization: Simulate Transitional Dynamics & Growth Paths]
    D --> E{Policy Strategy}
    E -->|Sole Focus on FDI| F[Outcome: Middle-Income Trap]
    E -->|Initial FDI + R&D Investment| G[Outcome: Sustained Economic Growth]