Juma, Mary-Ann--Thesis

investment might hamper its ability to generate positive spillovers for the host economy.
These theories do not seem to have gained as much acceptance as those highlighted
previously, as the view that FDI is beneficial for growth continues to be popular. This is
evidenced by the actions of NEPAD and NIPC, for example.
4.2 FDI-growth equation
To generate an equation linking FDI and economic growth, I follow Akinlo
(2003), Balasubramanyam et al (1996) and de Mello (1997) and make use of a modified
production function which incorporates FDI as an input. The augmented production
function is written as:
( ) ( )
where Y is output, is domestically-owned capital stock, is foreign-owned capital
stock (or the stock of FDI) and L is labor. The inclusion of FDI or foreign-owned capital
in the production function is due to FDI’s function as capital and its projected role as a
technology diffuser, according to the capital formation and technological spillovers
theories. The decomposition of capital into foreign and domestic also allows the impact
of FDI to be isolated from that of domestic capital.
Assuming (1) follows a log-linear form, I take the logarithms of both sides:
( ) ( ) ( ) (2)
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