Foreign Direct Investment and Total Factor Productivity Growth: New Macro‐Evidence

Abstract

Although the role of foreign direct investment (FDI) in facilitating technology transfer is well known in the literature, empirical evidence regarding the effect of FDI on growth is mixed. The contradictory results in the literature may be due to the failure to account for endogeneity and for the abortive capacity of the hosting countries. Using panel data for 49 countries over the period 1974–2008 and the existence of Investment Promotion Agencies in the receiving countries as an instrument, our results show that increased FDI stock leads to higher productivity growth. We also find a significant positive effect on the interaction between FDI stock and distance to the technological frontier, suggesting that the ability of technologically backward countries in absorbing technologies developed at the frontiers increases as more FDI stock is accumulated.

The long-run effect of foreign direct investment on total factor productivity in developing countries: a panel cointegration analysis

“…where log(TFP it ) is the log of TFP of country i in period t and FDI it represents our measure of FDI for country i at time t. Following most of the recent literature (see, e.g., Ford et al, 2008;de Sousa and Lochard, 2011;Chintrakarn et al, 2012, Baltabaev, 2014, we measure FDI by FDI stocks rather than FDI flows. Stocks may more effectively capture long-run effects due to the accumulation of flows (see, e.g., Chintrakarn et al, 2012).…”

“…In countries without developed financial markets, local firms are unable to make such investments (see also Alfaro et al, 2004). Baltabaev ( 2014), using panel data for 21 developed and 28 developing countries, finds that FDI has a positive effect on TFP growth, but this effect is statistically significant only for those countries in which GDP per worker relative to the United States is below a certain threshold. He argues that the opportunities for countries to improve their productivity through FDI are greater the larger the technological gap.…”

Productivity Gap: A Chance or an Obstacle in Absorbing Benefits from FDI in a Host Country

“…Baltabaev (2014), when analysing 49 countries found that the incensement in FDI stocks leads to higher productivity growth. In the view of the authors of this study, the question of the importance of the origin of FDI in the case of potential benefits for the host country is also examined in the work by Azeroual (2016).…”

Does FDI Really Matter to Economic Growth in India?

“…Given that total factor productivity (TFP) growth obtained by the Solow residual approach is widely used to measure FDI spillovers and the growth effect of FDI is considered to be a long-run phenomenon, empirical focus in this article is on assessing the long-run effects of FDI on TFP of India, controlling for trade, in the cointegrated vector autoregression (CVAR) framework. 1 It should be noted that our article is part of a larger literature; since the seminal work by Findlay (1978), many scholars have sought to isolate the independent effect of FDI on TFP (e.g., Gorg and Greenway 2004;Alfaro et al 2009;Woo 2009;Baltabaev 2014;Ashraf Ayesha and Nunnenkamp 2016;Kannen et al 2017). For example, Alfaro et al (2009) study the FDI-TFP nexus by focusing on the complementarities between FDI and financial markets and report in passing a beneficial effect of FDI on TFP only if the host country has well-developed financial institutions; however, the existing literature has not yet examined the FDI-TFP nexus in India.…”