The role of FDI along transitional dynamics of the host country in an endogenous growth model

We investigate the role of foreign direct investment (FDI) in the transitional dynamics of host countries by using an optimal growth model. FDI may be beneficial for the host country because local people can work for multinational firms to get a favorable salary. However, if the host country only focuses on FDI, it may face a middle-income trap. We show that if the host country invests in research and development, its economy may have sustained growth. Moreover, in this case, FDI helps the host country only at the first stages of its development process.