Growth and the Quality of Foreign Direct Investment: Is All FDI Equal
43 Pages Posted: 18 Apr 2007
Date Written: May 2007
In this paper we distinguish different qualities of FDI to re-examine the relationship between FDI and growth. We use "quality" to mean the effect of a unit of FDI on economic growth. However, this is difficult to establish because it is a function of many different country and project characteristics which are often hard to measure. Hence, we differentiate quality FDI in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.
Keywords: foreign direct investment, economic growth, industry data, spillovers, instrumental variables
JEL Classification: F23, F36, F43, O40
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