What is foreign direct investment and how does it affect growth?

Foreign Direct Investment (FDI) is the process of a foreign company investing in a local company. An example would be if an American company purchased large shares of stock in a manufacturing plant in Vietnam. Purchasing shares of stock in a company is only one form of FDI. Other methods range from creating subsidiary companies to a full-blown merger with the company. The foreign company that invests in the local company tends to have a high degree of influence over that company.

While it is common in economics to believe that FDI does promote economic growth, this is not always the case. Economies that have a highly educated population with a large amount of human capital tend to experience growth at a higher pace. It is not clear that underdeveloped and highly regulated economies experience economic growth from foreign investment.