Foreign Direct Investment in Developing Economies: A Critical Review of Attraction Determinants and Conditions for Developmental Impact

Abstract

This study provided a critical review of the literature on foreign direct investment (FDI) and development in developing economies, with particular emphasis on the distinction between FDI attraction determinants and the conditions required for achieving developmental impact. The study argued that attracting foreign investment inflows was not sufficient, by itself, to generate sustainable developmental gains. Rather, such gains depended on investment quality, sectoral orientation, entry mode, linkages with domestic firms, and the absorptive capacity and institutional quality of the host economy. Methodologically, the study adopted a structured critical literature review, drawing on theoretical and empirical contributions related to Dunning’s eclectic paradigm (OLI), endogenous growth theory, absorptive capacity, institutional quality, and the environmental and social effects of FDI. The review found that the developmental impact of FDI was neither automatic nor uniform; rather, it was shaped by the interaction between investment quality, domestic capabilities, institutions, and public policies. The study recommended shifting investment policy from increasing the volume of inflows toward attracting and governing FDI that supported productivity, knowledge transfer, decent employment, and sustainable development.