Does the worldwide shift of FDI from manufacturing to services accelerate economic growth? A GMM estimation study

Abstract

We examine the effect of manufacturing and service FDI (foreign direct investment) on their own sector growth, the spillover to the other sectors and the overall economy in host countries. We identify significant sectoral and inter-industry spillover effects with various data classifications and types of FDI flows. Evidence reveals that growth effect of manufacturing FDI operates by stimulating activity in its own (manufacturing) sector and is prevalent in Latin America-Caribbean, in Europe-Central Asia, middle to low-income countries and economies with large industry share. A surge of service FDI is likely to spur growth in service industries but hurt activity in manufacturing industries. Financial service FDI enhances growth in South-East Asia and the Pacific, high income countries and service-based economies by stimulating activity in both manufacturing and service sectors. However, nonfinancial service FDI drains resources and hurts manufacturing industry in the same group of countries. We conclude that a shift from manufacturing to service FDI is likely to lead to deindustrialization in certain regions and types of economies if this shift is spearheaded by nonfinancial FDI.