Foreign Direct Investment and Growth in Low-Income Economies: A Literature Review

Abstract

This study reviews the recent literature on the relationship between Foreign Direct Investment (FDI) and economic growth in Low-Income Countries (LICs). While FDI is widely regarded as a driver of development through capital inflow, technology transfer, and integration into global markets, its effectiveness is far from guaranteed. Findings from recent empirical and theoretical works suggest that FDI only significantly contributes to growth when supported by strong institutional quality, strategic sectoral allocation, and high absorptive capacity, particularly in education and infrastructure. Moreover, investments in manufacturing and service sectors offer more substantial spillover effects compared to extractive industries, which often provide limited benefits to the broader economy. The review highlights the critical role of complementary conditions, such as macroeconomic and political stability, in ensuring FDI leads to sustainable and inclusive development. Thus, policymakers in LICs must focus not only on attracting foreign investment but also on creating enabling environments to maximize its developmental potential.