Escaping the middle income trap and getting economic growth: How does FDI can help the host country?

The paper investigates the country receiving FDI's optimal strategy in an optimal growth context. First, if the multinational enterprise has high productivity or the entry cost is high, no domestic firm enters the new industry. Still, the host economy's investment stock converges to a higher steady state than that of the closed economy. Second, if the old sector is strong enough and the domestic firm's productivity is high, the foreign firm will be dominated, even eliminated by the domestic one. Third, we show that if the host country invests in R\&D, its economy may grow without bounds. In this case, FDI helps the host country only at the first stages of its development process. We present empirical evidence that supports our theoretical findings.