How Does Foreign Direct Investment Affect Economic GrowthWe test the effect of foreign direct investment (FDI) on economic growth in a cross-country regression framework, utilizing data on FDI flows from industrial countries to 69 developing countries over the last two decades. Our results suggest that FDI is an important vehicle for the transfer of technology, contributing relatively more to growth than domestic investment. However, the higher productivity of FDI holds only when the host country has a minimum threshold stock of human capital. In addition, FDI has the effect of increasing total investment in the economy more than one for one, which suggests the predominance of complementarity effects with domestic firms. |
Other editions - View all
Common terms and phrases
1+black market premium 3SLS 69 developing countries absorptive capability advanced technology aggregate investment balance of payments Barro and Lee capital accumulation capital deepening coefficient on FDI Coefficient Standard errors contribution of FDI domestic firms domestic investment dummy as instruments East Asian dummy economic growth effect of FDI endogeneity problem equation FDI and human FDI on economic FDI on growth FDI*schooling flows from industrial foreign direct investment foreign exchange foreign firms framework government consumption growth rate host country host economy human capital increase inflow instrumental variable estimation interaction between FDI interaction between human interaction term Investment Rate lagged values level of human Log 1+black market Log initial GDP MNCs multinational corporations Nelson and Phelps number of varieties OECD overall parallel market premium percentage points productive than domestic rate of income regression 2.2 Romer sample secondary school attainment significant stock of human Sub-Saharan African dummy technological progress value of FDI varieties of capital