FDI and Export Upgrading

The debate on trade and growth increasingly focuses on the composition of exports. Exports of more "sophisticated" products appear to be positively correlated with growth, and upgrading the quality of exports is high on the policy agenda of many countries. This study presents evidence suggesting that attracting inflows of FDI offers potential for raising the quality of exports in developing countries. Our empirical analysis relates unit values of exports measured at the 4-digit SITC level to data on sectors treated by investment promotion agencies as priority in their efforts to attract FDI. The sample covers 105 countries over the period 1984-2000. The findings are consistent with a positive effect of FDI on unit values of exports in developing countries. The evidence for high income economies is ambiguous. When we examine the link between FDI and the overlap between the export structure of developing and high income economies ("export sophistication"), we find no evidence of FDI increasing the similarity of export structure between the two groups.