Abstract:
We explore the effect of foreign direct investment on economic growth in developing countries, distinguishing between mergers and acquisitions ("M&As") and "greenfield" investment. A simple model captures the key difference between the two types of FDI: unlike greenfield investment, M&As partly represent a rent accruing to previous owners, and do not necessarily contribute to expanding the host country's capital stock. The model suggests that greenfield FDI has a stronger impact on growth than M&A sales. This hypothesis is supported by our empirical results, which show that greenfield FDI enhances growth, while M&As have no effect, at best.