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We estimate the impact of FDI on growth using sectoral data for FDI inflows to China and Vietnam. Previous empirical studies, using either cross-country growth regressions or firm-level micro-econometric analysis, fail to reach a consensus. Our paper is the first to use sectoral FDI inflow data to evaluate the sector-specific impact of FDI on growth. Our results show that, for the two developing-transition economies we examine, FDI has a statisticallysignificant positive effect on economic growth operating directly and through its interaction with labor. Intriguingly, we find the effects seem to be very different across economic sectors, with most of the beneficial impact concentrated in the secondary industries. Other sectors appear to see much less growth benefit from sector-specific FDI.

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We examine the impact of capital account policies on FDI inflows. Using an annual panel dataset of 83 developing and developed countries for 1984-2000, we find that capital account openness is positively but only very moderately associated with the amount of FDI inflows after controlling for other macroeconomic and institutional measures. To a large extent, other country characteristics seem to determine FDI inflows instead of capital account policies. We also find that capital controls are easily circumvented in corrupt and politically unstable regimes. We conclude that liberalizing the capital account is not sufficient to generate increases in inflows unless it is accompanied by a lower level of corruption or a decrease in political risk.

Foregin Direct Investment's (FDI's) contribution to growth has been a controversial topic in economic literature and appears to be country specific. In this article, we use time-varying coefficients in an augmented production function and let FDI indirectly affect Gross domestic product growth through labour productivity. This approach creates built-in heteroskedasticity, so the feasible generalized least square estimation is employed. The results show that FDI has significant and positive effect on labour productivity and economic growth in Vietnam, but the effect is not equally distributed among economic sectors.