Foreign direct investment, social capital, and the quality of economic growth

This paper examines whether Foreign Direct Investment (FDI) promotes the quality of economic growth in host economies, beyond contributing to short-term prosperity. Using a novel growth quality index, constructed through principal component analysis of indicators capturing efficiency, resilience, and sustainability, we find that FDI negatively affects growth quality, primarily by undermining efficiency and sustainability. Heterogeneity tests show that only wholly foreign-owned enterprises enhance growth quality, while joint ventures and cooperative enterprises exert adverse effects. Further analysis shows that social capital significantly mitigates the negative effects of FDI. Mechanism tests reveal that social capital improves the role of FDI by reducing moral hazard, reinforcing group constraints, strengthening social norms, and guiding value orientations. It is suggested that the government ease restrictions on foreign investment and cultivate social capital.