Technology diffusion and total factor productivity growth

Abstract

I investigate the effects of two important channels of technology diffusion (i) Foreign Direct Investment (FDI) and (ii) import of capital goods, on the total factor productivity (TFP) growth. My first essay contributes to the literature by empirically investigating the role of initial distance of a country from the technology frontier in determining the net effect of FDI on TFP growth. In this essay, I find that the net effect of FDI on TFP growth decreases with the increase in distance. In order to take this research a step further, I implement the recently developed threshold regression technique to explore the non-linearity associated with FDI. I find that if initial distance of a country exceeds a threshold level then the leader will have a locomotive effect and can pull the followers along, while in the other situation there is a significant negative impact of FDI that increases with distance as a result of which the net benefit from FDI can be miniscule. My second essay examines how technological distance affects the impact of capital goods imports on TFP growth. Both, at the aggregate level, and the disaggregated level, I find that distance is a significant determinant of the net effect of capital goods import on TFP growth. Interestingly, this study shows that as distance increases, the benefit from capital goods import also increases. The result is robust to instrumental variable estimation technique which addresses the problem of endogeneity. Thus, the results of my first two essays indicate that the two modes of technology diffusion - FDI and capital imports - play dramatically different role on TFP growth depending upon the initial distance of a country from the frontier. Final essay examines effects of FDI in Indian States in the post reform (post 1991) era. Since the adoption of New Industrial Policy (NIP) and on going reform process, Foreign Direct Investment (FDI) inflows have increased substantially. Using recent data on FDI our results indicate higher human capital and financial assistance are essential ingredients to reap benefits from FDI for Indian states.