The impact of foreign direct investment on total factor productivity growth

Abstract

PurposeThe purpose of this study is to examine the association between inward foreign direct investment (FDI) and bank level productivity changes.Design/methodology/approachThe paper uses an international sample of 566 publicly quoted commercial banks operating in 75 countries, covering the period 2000‐2004. The empirical analysis is conducted in two stages. First, a non‐parametric Malmquist analysis is employed to decompose total factor productivity (TFP) change of banks into pure efficiency, scale efficiency and technological change. Then, panel regressions are performed to identify the productivity impact of FDI while controlling for relevant bank‐specific and country‐specific characteristics.FindingsThe results indicate that inward FDI has a negative short‐term level effect but a positive long‐term rate effect on TFP change, which is consistent with the evidence from the Malmquist analysis suggesting that banks experience episodes of technical regress and progress.Originality/valueThe paper explores for the first time the link between FDI and bank level total factor productivity, hypothesising that aggregate FDI inflows yield productivity changes in the banking sector as part of the overall environmental effect on the economy, and providing supportive cross‐country evidence.