Foreign Direct Investment and Productivity Growth: A Survey of Theory

University of Nottingham Working Paper No. 2004/15

31 Pages Posted: 6 May 2005  

Ben Ferrett

Loughborough University

Date Written: 2004

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).

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

JEL Classification: F21, F23, O31, O40

Suggested Citation

Ferrett, Ben, Foreign Direct Investment and Productivity Growth: A Survey of Theory (2004). University of Nottingham Working Paper No. 2004/15. Available at SSRN: https://ssrn.com/abstract=716241 or http://dx.doi.org/10.2139/ssrn.716241

Ben Ferrett (Contact Author)

Loughborough University ( email )

School of Business and Economics
Loughborough University
Loughborough, LE11 3TU
Great Britain

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