Do Multinational Enterprises Contribute to Convergence or Divergence? A Disaggregated Analysis of Us FDI

Kiel Working Paper No. 1242

52 Pages Posted: 3 Jul 2005

See all articles by David Mayer-Foulkes

David Mayer-Foulkes

Centro de Investigación y Docencia Económicas (CIDE) - Division of Economics

Peter Nunnenkamp

University of Kiel

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005

Abstract

It is a widely held belief that foreign direct investment (FDI) has a positive effect on economic growth. We test this hypothesis by performing convergence regressions derived from a model of endogenous technological change. We estimate the rate of growth in per-capita income, relative to the per-capita income of the United States, in terms of US FDI, human development, financial development, and trade. We apply a panel approach, instrumenting for explanatory variables and correcting for correlated errors by clustering by countries. The heterogeneity of FDI is taken into account by considering various FDI-related activities - in addition to the conventionally used FDI stocks and flows. Furthermore, we draw on industry-specific FDI data, rather than exclusively on aggregated data. Our empirical analysis puts into question the currently prevailing euphoria about FDI as a means to induce economic catching-up processes of developing countries. We conclude that the central challenge facing policymakers is not to attract FDI, but to improve the local conditions required to benefit from the widely perceived unique advantages of FDI. In addition, our findings support the proposition that FDI stocks do not adequately reflect FDI-related economic activities.

Keywords: Foreign direct investment, heterogeneity of FDI, growth effects, convergence regressions

JEL Classification: F23, O40

Suggested Citation

Mayer-Foulkes, David and Nunnenkamp, Peter, Do Multinational Enterprises Contribute to Convergence or Divergence? A Disaggregated Analysis of Us FDI (May 2005). Kiel Working Paper No. 1242. Available at SSRN: https://ssrn.com/abstract=750104 or http://dx.doi.org/10.2139/ssrn.750104

David Mayer-Foulkes

Centro de Investigación y Docencia Económicas (CIDE) - Division of Economics ( email )

Carretera Mexico Toluca 3655
01210 Mexico, D.F.
Mexico
+52 55 5727 9839 (Phone)
+52 55 5727 9878 (Fax)

HOME PAGE: http://www.cide.edu/investigador/profile.php?IdInvestigador=25

Peter Nunnenkamp (Contact Author)

University of Kiel ( email )

D-24100 Kiel
Germany

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