IDEAS home Printed from https://ideas.repec.org/a/sae/mareco/v14y2020i2p164-190.html
   My bibliography  Save this article

Foreign Direct Investment and Total Factor Productivity: Any Nexus?

Author

Listed:
  • Mohammed Abdullah

    (Mohammed Abdullah is at the Department of Economics, Okanagan College, British Columbia, Canada, e-mail: mabdullah@okanagan.bc.ca)

  • Murshed Chowdhury

    (Murshed Chowdhury (corresponding author) is at the Department of Economics, University of New Brunswick, New Brunswick, Canada.)

Abstract

This study examines the impact of foreign direct investment (FDI) on the total factor productivity (TFP) of host countries. Extensions of the new growth theory provide a framework in which FDI increases the growth rate of a host country through technology transfer, diffusion and spillover effects. We construct four new series of TFP using the framework of neoclassical growth models. We also address the issue of endogeneity using the generalized method of moments. Our estimations using a balanced panel of 77 low- and middle-income countries suggest that FDI could not promote TFP in the countries studied. Our sensitivity analysis, in terms of alternative estimation methods, data, models and time period, reinforces the findings. We observe that the lack of absorptive capacity is likely to be an important reason for not having a direct relationship between FDI and TFP. JEL Classification: F21, F23, O33, F43, C33

Suggested Citation

  • Mohammed Abdullah & Murshed Chowdhury, 2020. "Foreign Direct Investment and Total Factor Productivity: Any Nexus?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(2), pages 164-190, May.
    • Handle: RePEc:sae:mareco:v:14:y:2020:i:2:p:164-190
    DOI: 10.1177/0973801020904473
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0973801020904473
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0973801020904473?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Caselli, Francesco, 2005. "Accounting for Cross-Country Income Differences," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 9, pages 679-741, Elsevier.
    3. King, Robert G. & Levine, Ross, 1994. "Capital fundamentalism, economic development, and economic growth," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 259-292, June.
    4. Balasubramanyam, V N & Salisu, M & Sapsford, David, 1996. "Foreign Direct Investment and Growth in EP and IS Countries," Economic Journal, Royal Economic Society, vol. 106(434), pages 92-105, January.
    5. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    6. Fosfuri, Andrea & Motta, Massimo & Ronde, Thomas, 2001. "Foreign direct investment and spillovers through workers' mobility," Journal of International Economics, Elsevier, vol. 53(1), pages 205-222, February.
    7. Holger Görg & David Greenaway, 2016. "Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?," World Scientific Book Chapters, in: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT Volume 53: World Scientific Studies in International Economics, chapter 9, pages 163-189, World Scientific Publishing Co. Pte. Ltd..
    8. Luiz R. de Mello Jr., 1997. "Foreign Direct Investment in Developing Countries: A Selective Survey," Studies in Economics 9701, School of Economics, University of Kent.
    9. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    10. Ayhan Kose, M. & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does openness to international financial flows raise productivity growth?," Journal of International Money and Finance, Elsevier, vol. 28(4), pages 554-580, June.
    11. Brian J. Aitken & Ann E. Harrison, 2022. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 6, pages 139-152, World Scientific Publishing Co. Pte. Ltd..
    12. Damijan, Joze P. & Knell, Mark & Majcen, Boris & Rojec, Matija, 2003. "The role of FDI, R&D accumulation and trade in transferring technology to transition countries: evidence from firm panel data for eight transition countries," Economic Systems, Elsevier, vol. 27(2), pages 189-204, June.
    13. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2004. "Some cautions on the use of panel methods for integrated series of macroeconomic data," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 322-340, December.
    14. Jakob B. Madsen, 2009. "Trade Barriers, Openness, and Economic Growth," Southern Economic Journal, John Wiley & Sons, vol. 76(2), pages 397-418, October.
    15. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    16. Botirjan Baltabaev, 2014. "Foreign Direct Investment and Total Factor Productivity Growth: New Macro-Evidence," The World Economy, Wiley Blackwell, vol. 37(2), pages 311-334, February.
    17. Wang, Jian-Ye & Blomstrom, Magnus, 1992. "Foreign investment and technology transfer : A simple model," European Economic Review, Elsevier, vol. 36(1), pages 137-155, January.
    18. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    19. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    20. Klenow, Peter J. & Rodriguez-Clare, Andres, 1997. "Economic growth: A review essay," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 597-617, December.
    21. Magnus Blomström & Ari Kokko & Mario Zejan, 2000. "Policies to Encourage Inflows of Technology through Foreign Multinationals," Palgrave Macmillan Books, in: Foreign Direct Investment, chapter 13, pages 203-220, Palgrave Macmillan.
    22. Magnus Blomström & Ari Kokko & Mario Zejan, 2000. "Technology, Market Characteristics and Spillovers," Palgrave Macmillan Books, in: Foreign Direct Investment, chapter 10, pages 160-176, Palgrave Macmillan.
    23. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    24. Albert G. Z. Hu & Gary H. Jefferson, 2002. "FDI Impact and Spillover: Evidence from China's Electronic and Textile Industries," The World Economy, Wiley Blackwell, vol. 25(8), pages 1063-1076, August.
    25. Asli Demeirgüç-Kunt & Ross Levine (ed.), 0. "Finance and Growth," Books, Edward Elgar Publishing, number 17119.
    26. David N. Well, 2007. "Accounting for the Effect Of Health on Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 1265-1306.
    27. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    28. Sourafel Girma & David Greenaway & Katharine Wakelin, 2013. "Who Benefits from Foreign Direct Investment in the UK?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(5), pages 560-574, November.
    29. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    30. Kamal Saggi, 2002. "Trade, Foreign Direct Investment, and International Technology Transfer: A Survey," The World Bank Research Observer, World Bank, vol. 17(2), pages 191-235, September.
    31. Benhabib, Jess & Spiegel, Mark M., 1994. "The role of human capital in economic development evidence from aggregate cross-country data," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 143-173, October.
    32. Castellacci, Fulvio & Natera, Jose Miguel, 2011. "A new panel dataset for cross-country analyses of national systems, growth and development (CANA)," MPRA Paper 28376, University Library of Munich, Germany.
    33. Sourafel Girma & David Greenaway & Katharine Wakelin, 2013. "Who Benefits from Foreign Direct Investment in the UK?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(5), pages 560-574, November.
    34. Dierk Herzer, 2012. "How Does Foreign Direct Investment Really Affect Developing Countries' Growth?," Review of International Economics, Wiley Blackwell, vol. 20(2), pages 396-414, May.
    35. Vinish Kathuria, 2000. "Productivity spillovers from technology transfer to Indian manufacturing firms," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 343-369, April.
    36. Caselli, Francesco, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 5266, London School of Economics and Political Science, LSE Library.
    37. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
    38. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    39. Steven Globerman, 1979. "Foreign Direct Investment and `Spillover' Efficiency Benefits in Canadian Manufacturing Industries," Canadian Journal of Economics, Canadian Economics Association, vol. 12(1), pages 42-56, February.
    40. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    41. Rosa Forte & Rui Moura, 2013. "The Effects Of Foreign Direct Investment On The Host Country'S Economic Growth: Theory And Empirical Evidence," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 58(03), pages 1-28.
    42. James Honaker & Gary King, 2010. "What to Do about Missing Values in Time‐Series Cross‐Section Data," American Journal of Political Science, John Wiley & Sons, vol. 54(2), pages 561-581, April.
    43. Matthias Busse, 2004. "Transnational Corporations and Repression of Political Rights and Civil Liberties: An Empirical Analysis," Kyklos, Wiley Blackwell, vol. 57(1), pages 45-65, February.
    44. Chang-Tai Hsieh & Peter J. Klenow, 2010. "Development Accounting," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 207-223, January.
    45. Jaejoon Woo, 2009. "Productivity Growth And Technological Diffusion Through Foreign Direct Investment," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 226-248, April.
    46. Barry P. Bosworth & Susan M. Collins, 2003. "The Empirics of Growth: An Update," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 113-206.
    47. Ronald Findlay, 1978. "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(1), pages 1-16.
    48. Li, Xiaoying & Liu, Xiaming, 2005. "Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship," World Development, Elsevier, vol. 33(3), pages 393-407, March.
    49. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-784, August.
    50. Ben S. Bernanke & Refet S. Gürkaynak, 2002. "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 11-72, National Bureau of Economic Research, Inc.
    51. Djankov, Simeon & Hoekman, Bernard M, 2000. "Foreign Investment and Productivity Growth in Czech Enterprises," The World Bank Economic Review, World Bank, vol. 14(1), pages 49-64, January.
    52. Caselli, Francesco, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 3567, London School of Economics and Political Science, LSE Library.
    53. Luiz de Mello, 1997. "Foreign direct investment in developing countries and growth: A selective survey," Journal of Development Studies, Taylor & Francis Journals, vol. 34(1), pages 1-34.
    54. Michael Kremer, 1993. "Population Growth and Technological Change: One Million B.C. to 1990," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 681-716.
    55. Lipsey, Robert E. & Sjoholm, Fredrik, 2004. "Foreign direct investment, education and wages in Indonesian manufacturing," Journal of Development Economics, Elsevier, vol. 73(1), pages 415-422, February.
    56. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
    57. V N Balasubramanyam & M Salisu & David Sapsford, "undated". "Foreign Direct Investment and Growth: New Hypotheses and Evidence," Working Papers ec7/96, Department of Economics, University of Lancaster.
    58. Herzer, Dierk & Klasen, Stephan & Nowak-Lehmann D., Felicitas, 2008. "In search of FDI-led growth in developing countries: The way forward," Economic Modelling, Elsevier, vol. 25(5), pages 793-810, September.
    59. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    60. Ozturk, I., 2007. "Foreign Direct Investment – Growht Nexus: A Review of The Recent Literature," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 4(2), pages 79-98.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Folorunsho M Ajide, 2021. "Does economic freedom affect entrepreneurship? Insights from Africa," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 13(2), pages 157-167.
    2. Ur Rehman, Faheem & Islam, Md. Monirul, 2023. "Does energy infrastructure spur total factor productivity (TFP) in middle-income economies? An application of a novel energy infrastructure index," Applied Energy, Elsevier, vol. 336(C).
    3. Mehmet Akyol & Emrullah Mete, 2021. "The Relationship Between Labor Productivity, Exports, and Foreign Direct Investment for Transition Economies," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 8(2), pages 155-171, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Neil Foster-McGregor, 2012. "Innovation and Technology Transfer across Countries," wiiw Research Reports 380, The Vienna Institute for International Economic Studies, wiiw.
    2. Kemeny, Thomas, 2010. "Does Foreign Direct Investment Drive Technological Upgrading?," World Development, Elsevier, vol. 38(11), pages 1543-1554, November.
    3. Holger Görg & David Greenaway, 2016. "Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?," World Scientific Book Chapters, in: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT Volume 53: World Scientific Studies in International Economics, chapter 9, pages 163-189, World Scientific Publishing Co. Pte. Ltd..
    4. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    5. Harrison, Ann & Rodríguez-Clare, Andrés, 2010. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4039-4214, Elsevier.
    6. Klaus E Meyer & Evis Sinani, 2009. "When and where does foreign direct investment generate positive spillovers? A meta-analysis," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 40(7), pages 1075-1094, September.
    7. Joze P. Damijan & Mark Knell & Boris Majcen & Matija Rojec, 2003. "Technology Transfer through FDI in Top-10 Transition Countries: How Important are Direct Effects, Horizontal and Vertical Spillovers?," William Davidson Institute Working Papers Series 549, William Davidson Institute at the University of Michigan.
    8. Shima’a Hanafy & Marcus Marktanner, 2019. "Sectoral FDI, absorptive capacity and economic growth – empirical evidence from Egyptian governorates," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 28(1), pages 57-81, January.
    9. Azman-Saini, W.N.W. & Baharumshah, Ahmad Zubaidi & Law, Siong Hook, 2010. "Foreign direct investment, economic freedom and economic growth: International evidence," Economic Modelling, Elsevier, vol. 27(5), pages 1079-1089, September.
    10. Matija Rojec & Mark Knell, 2018. "Why Is There A Lack Of Evidence On Knowledge Spillovers From Foreign Direct Investment?," Journal of Economic Surveys, Wiley Blackwell, vol. 32(3), pages 579-612, July.
    11. Capolupo, Rosa, 2009. "The New Growth Theories and Their Empirics after Twenty Years," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-72.
    12. Makiela, Kamil & Ouattara, Bazoumana, 2018. "Foreign direct investment and economic growth: Exploring the transmission channels," Economic Modelling, Elsevier, vol. 72(C), pages 296-305.
    13. Busse, Matthias & Groizard, José Luis, 2005. "FDI, Regulations and Growth," Conference papers 331335, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    14. Jen‐Chung Mei, 2023. "Foreign direct investment and relative capacity: Theory and evidence," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(4), pages 1175-1214, October.
    15. Ayesha Ashraf & Dierk Herzer & Peter Nunnenkamp, 2016. "The Effects of Greenfield FDI and Cross-border M&As on Total Factor Productivity," The World Economy, Wiley Blackwell, vol. 39(11), pages 1728-1755, November.
    16. Dierk Herzer & Julian Donaubauer, 2018. "The long-run effect of foreign direct investment on total factor productivity in developing countries: a panel cointegration analysis," Empirical Economics, Springer, vol. 54(2), pages 309-342, March.
    17. Matthias Busse & José Luis Groizard, 2008. "Foreign Direct Investment, Regulations and Growth," The World Economy, Wiley Blackwell, vol. 31(7), pages 861-886, July.
    18. Khaled Elmawazini & Elias G. Saleeby & Ahmed Ibn el Farouk & Bashayer AL-Naser, 2018. "Tripartite decomposition of labor productivity growth, FDI and human development: evidence from transition economies," Economic Change and Restructuring, Springer, vol. 51(2), pages 153-171, May.
    19. Coletta Frenzel Baudisch, 2018. "Sectoral FDI and the Real Exchange Rate: The Role of Financial Development," MAGKS Papers on Economics 201828, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    20. Crespo, Nuno & Fontoura, Maria Paula, 2007. "Determinant Factors of FDI Spillovers - What Do We Really Know?," World Development, Elsevier, vol. 35(3), pages 410-425, March.

    More about this item

    Keywords

    Total Factor Productivity (TFP); Foreign Direct Investment (FDI); GMM; Low- and Middle-income Countries; Spillover Effects;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:mareco:v:14:y:2020:i:2:p:164-190. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.ncaer.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.