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market. They conclude that the larger the proportion of the economy of an LDC in the

hands of MNCs, the greater the negative externalities.7

However, Firebaugh (1992) has demonstrated that the findings of these earlier

researchers are misleading. He has shown that the negative sign on FDI stock/GDP,

holding flows constant, is due to a denominator effect of flows over stock. The larger the

stock the smaller the investment rate, and vice versa. He argues that flows are positive

and stock negative because smaller investment rates are related to lower economic

growth

  • exactly

as

orthodox

theories

would

predict.

Firebaugh

finds

that

foreign

investment rates as well as domestic investment rates to be positively and significantly

related to growth, while foreign investment has a smaller impact. He concludes that

domestic investment is more effective than FDI.

While disagreeing with Firebaugh on several points, Dixon and Boswell (1996)

agree that the less-good foreign capital is likely to displace the better domestic capital

over time and thereby contribute towards lower economic growth in the long run. de

Soysa and Oneal (1999), using recent data, find that foreign and domestic investment

rates

both

show

positive

effects

on

growth.

They

also

fault

previous

studies

for

concluding that foreign capital is less good than domestic capital based on the absolute

size of the coefficients, because a percentage increase in foreign capital is not of the same

magnitude in terms of dollar value compared with a percentage increase in domestic

capital.

Furthermore, they find that FDI is at least three times as productive as domestic

investment dollar for dollar.

Using Granger causality tests they also show that foreign

7 Other studies following this strand include; Boswell and Dixon (1990) London and Williams (1990), Wimberley and Belo (1992). These studies highlight the various transgressions of powerful MNCs in the developing world.

12

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