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Few studies using gravity model have placed special emphasis on location

determinants of FDI. Chunlai (1997) using a modified gravity model found that market

size, GDP growth, manufacturing efficiency wage, remoteness, stock of FDI and

openness play a key role in attracting FDI. Recent studies by Nunnenkamp (2002), and

Banga (2003), have corroborated his findings. From these studies, we can conclude that

the determinants of FDI have not changed remarkably over time. Despite, the growing

importance of education and openness, it is still the market related determinants (GDP,

GDP per capita, population and GDP growth in real terms) which are most important.

In spite of the wealth of empirical literature on the positive effects of openness to

trade on rapid economic growth, the literature on the effects of FDI on growth has

generated a sea of contentious findings.6 The opponents of the neo-liberal policies and

globalization have focused on the exploitative nature of the multinational corporations.

Prominent studies holding this view include Bornschier (1980) and Bornschier and

Chase-Dunn (1985). They argue that FDI flows might have short-term beneficial effects

but that the long-term effects of the accumulation of FDI stock, as a percentage of GDP,

was negative on growth over time. Despite the great potential of FDI to enhance growth,

monopolistic tendencies of foreign subsidiaries may crowd out domestic investment

(Gardiner, 2000). Often domestic firms are incapable of successfully competing with

foreign firms, which have superior marketing and advertising power and are able to

engage in predatory pricing to restrict prospective entrants from gaining access to the

6 Recent findings on openness and economic growth are less ambiguous. For instance, see studies by Levine and Renelt (1992), Baldwin and Seghezza (1996) and Dollar and Kraay (2001).


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