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Openness and the Efficiency of FDI: A Panel Stochastic Production Frontier Study

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  • Farrokh Nourzad

Abstract

This paper uses a stochastic translog production frontier to estimate technical inefficiency indices whose conditional mean is specified as a function of FDI and its interaction with openness of the economy. The model is estimated using an annual panel of 46 countries for the years, 1981–2001. The results suggest that increased FDI increases potential output in both developed and developing countries with the effect being more profound in the former. It is also found that increased FDI reduces technical inefficiencies the more open is the economy but that this effect holds only for developed economies. Thus qualified support is found for the “Bhagwati hypothesis” as the results reveal that the efficiency–enhancing effect of FDI depends not only on openness but also on the degree of development of the host country. Copyright International Atlantic Economic Society 2008

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  • Farrokh Nourzad, 2008. "Openness and the Efficiency of FDI: A Panel Stochastic Production Frontier Study," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(1), pages 25-35, February.
    • Handle: RePEc:kap:iaecre:v:14:y:2008:i:1:p:25-35:10.1007/s11294-007-9128-5
    DOI: 10.1007/s11294-007-9128-5
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    More about this item

    Keywords

    Stochastic production frontier; FDI; Openness; Growth and development; C10; 010;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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