Intertwined roots symbolizing domestic and foreign investment.

Decoding Economic Growth: Why Investing in Local Businesses Could Be Your Best Bet

Lena Kashyap in Business & Economy August 2025 • 4 min read.

"New research reveals the surprising power of domestic investment in attracting foreign capital and fueling sustainable development."

For decades, developing countries have been told that foreign direct investment (FDI) is the golden ticket to economic prosperity. Lured by promises of growth, governments have rolled out the red carpet, offering incentives and subsidies to attract multinational corporations. But what if the key to unlocking sustainable development lies closer to home?

A groundbreaking study challenges the conventional wisdom, revealing that domestic investment – the money and resources poured into local businesses and infrastructure – plays a far more critical role in attracting FDI than previously thought. This research suggests that a thriving domestic sector acts as a powerful catalyst, signaling economic stability and opportunity to foreign investors.

In this article, we'll dive into the fascinating findings of this study, exploring how prioritizing local businesses can create a virtuous cycle of economic growth. We'll uncover the secrets to attracting FDI, not by offering handouts, but by building a strong, resilient domestic economy that benefits everyone.

The Overlooked Power of Domestic Investment: A Catalyst for FDI

Intertwined roots symbolizing domestic and foreign investment.

The study, which examined data from 68 developing countries over a 20-year period (1984-2004), found a strong, positive correlation between lagged domestic investment and FDI inflows. This means that countries with a history of robust domestic investment were more successful in attracting foreign capital.

Why does domestic investment have such a powerful effect? The researchers point to several key factors:

Signaling Economic Health: Local investment demonstrates confidence in the domestic market, signaling stability and growth potential to foreign investors.
Creating a Skilled Workforce: Domestic investment often leads to improvements in education and training, creating a skilled workforce that is attractive to foreign companies.
Building Infrastructure: Investment in infrastructure, such as roads, ports, and communication networks, reduces transaction costs and makes it easier for foreign companies to operate.
Fostering Innovation: A thriving domestic sector encourages innovation and entrepreneurship, creating a dynamic business environment that attracts FDI.

In essence, domestic investment creates a virtuous cycle: local businesses thrive, infrastructure improves, the workforce becomes more skilled, and foreign investors take notice, pouring in capital to further fuel growth. It's a recipe for sustainable development that benefits everyone.

Turning the Tide: Prioritizing Local Businesses for a Brighter Future

The implications of this research are clear: developing countries should shift their focus from simply attracting FDI to actively promoting domestic investment. By creating a supportive environment for local businesses, governments can not only foster economic growth but also attract more sustainable and beneficial forms of foreign capital. It's time to move beyond the conventional wisdom and embrace a development strategy that puts local businesses first.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1590/s1415-98482012000300002, Alternate LINK

Title: An Empirical Criticism Of The "Fdi Development" Convention

Subject: General Economics, Econometrics and Finance

Journal: Revista de Economia Contemporânea

Publisher: FapUNIFESP (SciELO)

Authors: Marc Lautier, François Moreau

Published: 2012-12-01

Everything You Need To Know

What was the main finding of the study on domestic investment and foreign direct investment (FDI)?

The study revealed a strong positive correlation between lagged domestic investment and FDI inflows in 68 developing countries over a 20-year period (1984-2004). This suggests that consistent investment in local businesses and infrastructure makes a country more attractive to foreign investors. The research challenges the idea that simply offering incentives to multinational corporations is the most effective way to spur economic growth. The study highlights the importance of building a strong domestic economy as a foundation for attracting sustainable foreign capital.

According to the research, what are the key effects of domestic investment on attracting foreign direct investment?

Domestic investment has several key effects that make a country more attractive to foreign investors. These include signaling economic health by demonstrating confidence in the domestic market, creating a skilled workforce through improvements in education and training, building infrastructure such as roads and communication networks, and fostering innovation by encouraging entrepreneurship. These factors collectively create a virtuous cycle that fuels sustainable development.

What are the implications of this research for developing countries looking to attract foreign capital?

Prioritizing domestic investment can foster economic growth and attract more sustainable forms of foreign capital. By creating a supportive environment for local businesses, governments can strengthen their domestic economy and signal stability and opportunity to foreign investors. This approach moves beyond simply offering incentives to multinational corporations and focuses on building a resilient domestic economy that benefits everyone.

Does prioritizing domestic investment mean ignoring foreign direct investment (FDI) completely?

While the focus is on domestic investment, it's crucial to remember the importance of a balanced approach. The research emphasizes that a thriving domestic sector acts as a catalyst for attracting foreign direct investment, it doesn't negate the potential benefits of FDI. A strong domestic foundation can ensure that foreign investment is more sustainable and beneficial, aligning with the long-term development goals of the country. The study doesn't delve into specific policy recommendations or address the challenges of implementing these strategies in different contexts.

What are the broader implications of shifting the focus from attracting FDI to promoting domestic investment for economic development strategies?

This shift towards prioritizing domestic investment has significant implications for economic development strategies. It suggests that developing countries should focus on creating a supportive environment for local businesses, rather than solely relying on attracting foreign capital. This could involve investing in education, infrastructure, and innovation, as well as implementing policies that promote entrepreneurship and reduce barriers to entry for local businesses. The ultimate goal is to create a virtuous cycle of economic growth that benefits everyone, not just multinational corporations. However, the research doesn't provide a detailed roadmap for achieving this shift, leaving room for further exploration and context-specific adaptation.