How Does the Impact of Foreign Direct Investment on Labor Productivity Affects Productive Capacity?

Purpose: The study presents policy considerations to enable the potential role of PCI indicators in facilitating the beneficial role of FDI on LP to increase competitiveness of the host economies. Design/methodology/approach: Using panel data from 88 countries from 2000 to 2018, the study explores how FDI impacts LP and how these consequences differ depending on the level of PCI across two economic sectors: tradables and nontradables. Applying novel PCI, the findings demonstrate that initially FDI exacerbates LP in the above two sectors, and the improvement in PCI from FDI diminishes this detrimental impact until a threshold of PCI, then beyond that level, FDI enhances LP. Findings: The latter benefit is larger in the tradable sector than in the non-tradable sector, and this beneficial effect is amplified by increased FDI inflows. A set of robustness tests were performed to corroborate the findings. Notably, the internal mechanism of PCI's eight indicators moderates the influence of FDI on LP. Practical implications: Policy implications of this study reveal that, while FDI may not directly increase LP, PCI-backed FDI growth may imply an increase in LP.