Unraveling the Development of Underdevelopment: Examining the Impact of Foreign Investment on Economic Growth across Income Groups, 1997-2011

Debate upon the effect of foreign investment dependency on economic growth has been lasting for 40 years. Modernization theory upholds the positive effect of foreign investment. However, world-systems theory posits the development of the core relies on underdevelopment in the periphery. This theory breaks the fantasy of development and prompts cruel facts to challenge the modernization theory. The current research continues the previous studies of foreign investment dependency and economic growth. After controlling the effect of export dependency, population growth, urbanization and female labor participation, the current research finds that the effect of foreign investment dependency diverges across development level groups. For lower-developed countries, foreign investment demonstrates a negative effect on economic performance, but a positive one in rapidly developing countries. This divergent effect opens a window on the universe of world-systems research and encourages future research to focus on variation of foreign investment's effect across different development levels as well as its source, composition and target industries.