FDI without explaining its phenomenon, it has widely contributed to international
Theories of Economic Growth and FDI
According to the standard neoclassical theories, economic growth and
development is based on the utilization of land, labour and capital in production.
developing countries in general, have underutilized land and labour and exhibit low
savings rate, the marginal productivity of capital is likely to be greater in these countries.
Thus, the neo-liberal theories of development assume that interdependence between the
developed and the developing countries can benefit the latter. This is because capital will
flow from rich to poor areas where the returns on capital investments will be highest,
helping to bring about a transformation of ‘backward’ economies. Furthermore, the
standard neo-classical theory predicts that poorer countries grow faster on average than
richer countries because of diminishing returns on capital. Poor countries were expected
to converge with the rich over time because of their higher capacity for absorbing capital.
The reality, however, is that over the years divergence has been the case, the gap between
the rich and poor economies has continued to increase. The volume of capital flow to the
poor economies relative the rich has been low.
Arghiri’s (1972) “Unequal Exchange” brought the whole issue of the validity of
comparative advantage once again, into sharp focus. He accepts the law on its own but
tries to integrate international capital and commodity flow into the law. His argument
attempts to overthrow Ricardo’s most fundamental assumption- international immobility
He sets out to investigate how international capital flows affect Ricardo’s
law and endeavors to see the current form of the law in a modern world. Arghiri shows