Productive Capacity, Diversification and Foreign Direct Investment (FDI) in LDC

The recent debate about the role of productive capacity, diversification and FDI in global manufacturing has shown that what the economy produce matters. It is also clear that economic liberalization and comparative advantage do not explain the productive structure. Thus, governmental intervention has been critical and it has had significant role in almost all successful stories. Our study points out that development entails diversification, not specialization, since per capita income has real impact on the density of the industrial sector; countries that are growing faster (China) are facing far-reaching transformation in their productive structures. The empirical results have revealed that during the initial process of economic development countries tend to diversify, but that assumption cannot be extended for countries on the high-income group. As a general guide, countries need to balance their macro stability policies with industrial economic strategy, focusing primarily on the needs of real sector. While developing countries want to keep an accelerated pace towards higher standards of living through industrial promotion, developed countries want to prevent the deindustrialization process that takes place when countries reach the steady state.