JAKARTA — Foreign Direct Investment (FDI) has long been hailed as the primary engine of growth for developing nations. However, a new study reveals that international capital inflows do not automatically enhance national competitiveness. The effectiveness of foreign investment depends heavily on the infrastructure readiness and absorptive capacity of the host country.
These findings were brought to light in a multidimensional study conducted by Irna Kumala, Heru Subiyantoro, and Jooner Rambe from Borobudur University and Indraprasta PGRI University. The research, published in 2026, analyzed panel data from 24 countries over the period from 2007 to 2023. The researchers divided the sample into two main groups to observe structural economic differences: 11 upper-middle-income countries and 13 lower-middle-income countries.
Historically, many nations have competed to offer incentives to attract foreign investors. The expectation is that multinational corporations will bring not only financial resources but also advanced technology, managerial expertise, and access to global production networks. The challenge is that technology transfer and domestic productivity gains often fail to materialize if local industries in the host country are not equipped to absorb those innovations.
To test this phenomenon, the research team applied the Arellano-Bond Generalized Method of Moments (GMM) dynamic quantitative approach. This method was selected to evaluate the complex, ongoing relationship between investment inflows and the accumulation of competitiveness over time without technical bias.
The data analysis revealed a significant gap in impact between the two economic groups. In upper-middle-income countries such as China, Malaysia, Thailand, and Turkiye, FDI proved to have a strong and highly significant positive effect on boosting national competitiveness. Conversely, in lower-middle-income countries, including Indonesia, India, the Philippines, and Vietnam, the effect of FDI on competitiveness was found to be positive but much weaker and less stable.
This divergence reinforces the economic theory that the benefits of foreign investment are conditional. Upper-middle-income countries generally possess robust infrastructure networks, stable legal institutions, highly skilled labor, and mature domestic industrial systems. These ideal conditions allow local firms to capture spillovers, adopt international operational standards, and integrate smoothly into global value chains.
Meanwhile, in lower-middle-income economies, knowledge transfer from foreign investment is frequently constrained by limitations in human capital, shallow financial markets, and weak linkages between foreign investors and domestic suppliers. As a result, the benefits of foreign capital remain concentrated within specific sectors rather than generating a broad domino effect across the wider economy.
This research carries critical implications for public policy and economic regulation strategies. Governments in developing countries are advised to shift their policy focus away from merely chasing the nominal volume of incoming investment. The primary focus must turn toward improving the quality and embedding foreign investment deeply into the domestic real sector. For countries like Indonesia, development priorities should be directed at institutional reforms, upgrading educational and labor quality, and developing the capacity of local vendors to become strategic partners for global corporations.
Author Profile
- Irna Kumala: Universitas Indraprasta PGRI / Universitas Borobudur.
- Heru Subiyantoro: Universitas Borobudur.
- Jooner Rambe: Universitas Borobudur.
Research Source
Article Title: Does Foreign Direct Investment Improve National Competitiveness? Dynamic Panel Evidence from Upper- and Lower-Middle-Income Countries
Journal Name: East Asian Journal of Multidisciplinary Research (EAJMR)Publication Year: 2026
DOI:
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