THE ROLE OF FOREIGN DIRECT INVESTMENT IN BRIDGING OUTPUT GAPS AND ENHANCING POTENTIAL GDP IN DEVELOPING ECONOMIES
Keywords:
output gaps, developing economies, fiscal space, macroeconomic stabilization, sectoral targeting, economic productivity, absorptive capacity, governance reforms, policy frameworks, inflationary pressures, sectoral alignment, political stability, resource misallocation, structural reforms, complementary factorsAbstract
Foreign Direct Investment (FDI) is crucial for economic growth and development in developing economies, providing vital capital, technology, and managerial expertise. This study examines FDI's potential to bridge output gaps and enhance potential GDP, highlighting its role in addressing structural inefficiencies, promoting productivity, and stabilizing macroeconomic conditions. The analysis covers various regions, including Sub-Saharan Africa, Central and Eastern Europe, and Latin America, emphasizing the varied impacts of FDI across sectors and its dependence on host countries' absorptive capacities and institutional quality. Key findings indicate that manufacturing-focused FDI consistently provides significant economic benefits, whereas the effectiveness of service-oriented FDI depends on governance and economic priorities. Challenges such as poor governance, structural bottlenecks, and inconsistent policies may impede the impact of FDI, despite its potential. This research highlights the necessity for targeted reforms and strategic policy interventions to optimize FDI benefits, ensuring sustainable and inclusive economic growth in developing economies.
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