US Foreign Affiliates, Technology Diffusion and Host Country Human Development: Human Development Index versus Human Capital

In this study, we use a cross-sectionally correlated and timewise autoregressive model and panel data for the period 1966--2000 to investigate human development as a measure of host country absorptive capacity in 30 developed and developing countries. The results suggest that technology diffusion from US foreign affiliates has a positive and significant impact on labor productivity only if host countries have a minimum level of human development. This condition may partially explain why previous studies show mixed support for the hypothesis that foreign affiliates have a positive effect on productivity in developing countries. Although the results have to be interpreted with caution, the policy implication is that human development enhances the capacity of countries to reap the benefits of foreign direct investments.