Abstract

This paper investigates the relation between foreign direct investment and economic growth under the effects of the financial liberalization processes. The paper focuses on the emerging markets, where the flows of foreign direct investment are most active and the financial liberalization processes are most intensifying. Analysis of 24 emerging markets over the 1980–2004 period shows that the easing of short-term capital flows diminishes the positive effects of foreign direct investment. The finding has important implications for policy makers in emerging markets.

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