Abstract

In this paper we examine the relationship between inward FDI and total factor productivity (TFP) in a framework motivated by the OLI paradigm. A panel data approach is used to study the effects of FDI and payments of royalties and license fees (R&L) on aggregate TFP in a sample of 16 OECD countries, between 1985 and 2002. Our empirical tests show that FDI and R&L have a positive impact on host-country TFP, and also suggest that the amount of positive effects of FDI and R&L is dependent on the level of development of the receiving country. Additionally, our data show that, when other factors remain constant, inward FDI and R&L payments are substitutes in positively influencing TFP of the host country.

Highlights

  • In recent years improved attention has been paid to the deep analysis of the effects of Foreign Direct Investment (FDI)

  • In this paper we examine the relationship between inward FDI and total factor productivity (TFP) in a framework motivated by the OLI paradigm

  • Whereas OLS estimation shows that the Researchers in R&D (RRD) coefficient is not significantly different from 0, along with absence of statistical significance of FDI and of the interaction between FDI and the level of development, the regressions based on Generalized Least Squares (GLS) and Seemingly Unrelated Regression (SUR) show that all coefficients have the predict signs and are significant at a 1 percent level

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Summary

Introduction

In recent years improved attention has been paid to the deep analysis of the effects of Foreign Direct Investment (FDI) (see, for example, Blomström and Kokko, 2003; and Görg and Greenaway, 2004). While some studies – using aggregate FDI flows for a broad cross-section of countries – have generally suggested a positive role for FDI in generating economic growth, in environments where the capability of absorption matters (De Gregorio, 1992), other works using more sophisticated econometric methods (Carkovic and Levine, 2002; Alfaro et al, 2004; Chowdhury and Mavrotas, 2006) cast doubts about the optimistic conclusions of the first analyses. While some studies – using aggregate FDI flows for a broad cross-section of countries – have generally suggested a positive role for FDI in generating economic growth, in environments where the capability of absorption matters (De Gregorio, 1992), other works using more sophisticated econometric methods (Carkovic and Levine, 2002; Alfaro et al, 2004; Chowdhury and Mavrotas, 2006) cast doubts about the optimistic conclusions of the first analyses4 As it is well known, some problems have affected the microeconomic empirical studies of inward. International diffusion of technology in thirteen OECD countries, with the same R&D weighting approach that Coe and Helpman (1995) and Keller (1998) use for imports, and they do not find significant effects from inward FDI. 5 This lack of empirical research on FDI in the services sector is increasingly troublesome, owing to the growing importance of services in production, in trade, and in investment. 6 For example, Carkovic and Levine (2002) argue that the macroeconomic findings on growth and FDI must be viewed suspiciously, because existing studies do not fully control for simultaneity bias, country-specific effects, and the routine use of lagged dependent variables in growth regressions

The relationship between FDI and productivity
Empirical evidence
Descriptive framework
Empirical tests
Effects
Findings
Concluding remarks
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