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Foreign Direct Investment and Total Factor Productivity: Any Nexus?

Author

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  • Mohammed Abdullah

    (Mohammed Abdullah is at the Department of Economics, Okanagan College, British Columbia, Canada, e-mail: mabdullah@okanagan.bc.ca)

  • Murshed Chowdhury

    (Murshed Chowdhury (corresponding author) is at the Department of Economics, University of New Brunswick, New Brunswick, Canada.)

Abstract

This study examines the impact of foreign direct investment (FDI) on the total factor productivity (TFP) of host countries. Extensions of the new growth theory provide a framework in which FDI increases the growth rate of a host country through technology transfer, diffusion and spillover effects. We construct four new series of TFP using the framework of neoclassical growth models. We also address the issue of endogeneity using the generalized method of moments. Our estimations using a balanced panel of 77 low- and middle-income countries suggest that FDI could not promote TFP in the countries studied. Our sensitivity analysis, in terms of alternative estimation methods, data, models and time period, reinforces the findings. We observe that the lack of absorptive capacity is likely to be an important reason for not having a direct relationship between FDI and TFP. JEL Classification: F21, F23, O33, F43, C33

Suggested Citation

  • Mohammed Abdullah & Murshed Chowdhury, 2020. "Foreign Direct Investment and Total Factor Productivity: Any Nexus?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(2), pages 164-190, May.
    • Handle: RePEc:sae:mareco:v:14:y:2020:i:2:p:164-190
    DOI: 10.1177/0973801020904473
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    More about this item

    Keywords

    Total Factor Productivity (TFP); Foreign Direct Investment (FDI); GMM; Low- and Middle-income Countries; Spillover Effects;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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