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FDI without explaining its phenomenon, it has widely contributed to international

production theory.

2.2

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.

Since

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

of factors.

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

7

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