Foreign Direct Investment and Productivity Growth: A Survey of Theory

Abstract:     
This paper analyses several theoretical perspectives on the relationship between foreign direct investment (FDI) flows and 'productivity growth', interpreted as growth in total factor productivity (TFP). We begin with general equilibrium models. An open economy version of Solow's famous (1956) growth model is developed, where North-to-South FDI flows both equalize the return to capital across countries and transfer technical knowledge internationally. Two recent models of general equilibrium with imperfect competition are also discussed: one allows for specialisation in intermediates production à la Ethier (1982), and the other contains endogenous R&D decisions. Three partial equilibrium models are then presented to provide 'strategic' (game theoretic) analyses of (a) how spillovers affect an MNE's choice between FDI and exporting; (b) trained worker mobility as a specific mechanism for spillovers; and (c) the relationship between FDI flows and R&D performance. Before evaluating the state of research on the FDI/ productivity relationship (in the Conclusion), the penultimate section considers whether the form of FDI ('greenfield investment' versus cross-border mergers and acquisitions) undertaken matters for its relationship with TFP growth in two game-theoretic models (first, with endogenous R&D; and, second, when firms differ in their technologies).

Number of Pages in PDF File: 31

Keywords: foreign direct investment,productivity growth,total factor productivity,spillovers,R&D,acquisition-FDI,greenfield-FDI

JEL Classification: F21, F23, O31, O40

working papers series