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Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?

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Author Info
Laura Alfaro
Andrew Charlton

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Abstract

In this paper we distinguish different "qualities" of FDI to re-examine the relationshipbetween FDI and growth. We use 'quality' to mean the effect of a unit of FDI on economicgrowth. However this is difficult to establish because it is a function of many differentcountry 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 FDIdiffer by sector. Second, we differentiate FDI based on objective qualitative industrycharacteristics including the average skill intensity and reliance on external capital. Third, weuse a new dataset on industry-level targeting to analyze quality FDI based on the subjectivepreferences expressed by the receiving countries themselves. Finally, we use a two-stage leastsquares methodology to control for measurement error and endogeneity. Exploiting a newcomprehensive industry level data set of 29 countries between 1985 and 2000, we find thatthe growth effects of FDI increase when we account for the quality of FDI.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0830.

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Date of creation: Nov 2007
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Related research
Keywords: foreign direct investment; economic growth; industry data; spillovers; instrumental variables;

Find related papers by JEL classification:
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Monnet Gbakou & Mustapha Sadni Jallab & René Sandretto, 2008. "Foreign Direct Investment, Macroeconomic Instability And Economic Growth in MENA Countries," Post-Print halshs-00303694_v1, HAL. [Downloadable!]
    Other versions:
  2. Tam Bang Vu & Ilan Noy, 2007. "Sectoral Analysis of Foreign Investment and Growth In the Developed Countries," Working Papers 200725, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
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