Bilateral FDI Flows, Productivity Growth, and Convergence: The North vs. The South

Abstract

Summary Controlling for the aggregation bias in FDI flows and the home and host country heterogeneity within and between Northern and Southern countries, we explore the effects of bilateral FDI flows on host country productivity growth, and on the productivity convergence dynamics between the host and the productivity-frontier country. Using bilateral FDI flows’ data from 108 host and 240 home countries over 1990–2012, and employing a variety of estimation techniques together with a rich battery of robustness tests, we find no significant effect of bilateral FDI flows on either host country productivity growth or on the productivity gap between the host and the frontier country. We also show that these findings are not sensitive to the direction of FDI flows, which are South-South, South-North, North-South or North-North. In a decomposition exercise, we also fail to find any significant effect of bilateral or aggregate FDI flows on physical capital growth. Yet, we find some evidence of a positive effect of FDI flows on human capital growth but just in one direction, South-South. Last but not least, we fail to find any productivity growth or convergence effect at the sectoral level, including agricultural, industry, or services sectors.