FDI and Growth: What Cross-Country Industry Data Say

Abstract

The theoretical literature has discussed different channels through which foreign direct investments (FDI) promote host country’s economic growth, but empirical analyses have so far been inconclusive. In this paper we provide evidence that FDI have a positive and statistically significant growth effect in recipient countries, using a panel of 14 manufacturing sectors for (a sample of) developed and developing countries over the period 1992-2004. This effect is stronger in capital intensive and in technologically advanced sectors, and comes primarily from an increase in labor productivity, suggesting that FDI not only contribute to physical capital accumulation, but also generate positive technological spillovers. The policy implications of our findings are important, especially for developing countries, where the growth enhancing promotion of foreign investment in capital intensive and technologically advanced sectors is at the heart of the debate.

Keywords: foreign direct investment, economic growth, capital intensity, technological progress, patents, labor productivity

JEL Classification: F23, F36, F43, O16