Does economic complexity influence the efficacy of foreign direct investment? An empirical inquiry

Abstract

This paper aims to determine whether economic complexity influences the efficacy of inward foreign direct investment (FDI). To this end, in the context of a theoretical framework, we estimate a model that relates economic growth to the flow as well as the stock of FDI while taking into account the role of complexity of the economy (measured by the Economic Complexity Index). This index captures the capabilities that are embodied in the productive structure of the economy. Our empirical work shows that economic complexity influences the growth effect of FDI on the host countries. We find countries that rank relatively high in economic complexity benefit from FDI while countries that rank very low may be adversely affected.