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Do Multinational Enterprises Contribute to Convergence or Divergence? A Disaggregated Analysis of US FDI

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  • David Mayer-Foulkes
  • Peter Nunnenkamp

Abstract

It is a widely held belief that foreign direct investment (FDI) has a positive effect on economic growth. We test this hypothesis by performing convergence regressions derived from a model of endogenous technological change. We estimate the rate of growth in per-capita income, relative to the per-capita income of the United States, in terms of US FDI, human development, financial development, and trade. We apply a panel approach, instrumenting for explanatory variables and correcting for correlated errors by clustering by countries. The heterogeneity of FDI is taken into account by considering various FDI-related activities – in addition to the conventionally used FDI stocks and flows. Furthermore, we draw on industry-specific FDI data, rather than exclusively on aggregated data. Our empirical analysis puts into question the currently prevailing euphoria about FDI as a means to induce economic catching-up processes of developing countries. We conclude that the central challenge facing policymakers is not to attract FDI, but to improve the local conditions required to benefit from the widely perceived unique advantages of FDI. In addition, our findings support the proposition that FDI stocks do not adequately reflect FDI-related economic activities.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1242.

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Length: 50 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:kie:kieliw:1242

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Keywords: foreign direct investment; heterogeneity of FDI; growth effects; convergence regressions;

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References

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  1. Manuel R. AGOSIN & Ricardo MAYER, 2000. "Foreign Investment In Developing Countries, Does It Crowd In Domestic Investment?," UNCTAD Discussion Papers, United Nations Conference on Trade and Development 146, United Nations Conference on Trade and Development.
  2. Bruce A. Blonigen & Miao Wang, 2004. "Inappropriate Pooling of Wealthy and Poor Countries in Empirical FDI Studies," NBER Working Papers 10378, National Bureau of Economic Research, Inc.
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  4. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2004. "The Effects of Financial Development on Convergence: Theory and Evidence," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c009_021, DEGIT, Dynamics, Economic Growth, and International Trade.
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Cited by:
  1. Thomas Gall & Marc Schiffbauer & Julia Kubny, 2009. "Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series, Boston University - Department of Economics dp-188, Boston University - Department of Economics.
  2. Marouane ALAYA (GREThA) & Dalila NICET-CHENAF (GREThA) & Eric ROUGIER (GREThA), 2007. "FDI Promotion policies and dynamic of growth in the South East Mediterranean countries (In French)," Cahiers du GREThA, Groupe de Recherche en Economie Théorique et Appliquée 2007-06, Groupe de Recherche en Economie Théorique et Appliquée.
  3. Peter Nunnenkamp & Rainer Thiele, 2011. "Financing for Development: The Gap between Words and Deeds since Monterrey," Kiel Working Papers 1691, Kiel Institute for the World Economy.
  4. Elias Ajaga & Peter Nunnenkamp, 2008. "Inward FDI, Value Added and Employment in US States: A Panel Cointegration Approach," Kiel Working Papers 1420, Kiel Institute for the World Economy.
  5. Jan Hanousek & Evžen Kočenda & Mathilde Maurel, 2010. "Direct and indirect effects of FDI in emerging European markets : a survey and meta-analysis," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00469544, HAL.
  6. Alaya MAROUANE (Université de Tunis) & Dalila NICET-CHENAF (GREThA-GRES) & Eric ROUGIER (GREThA-GRES), 2008. "The law of growth and attraction: an endogenous model of absorptive capacities, FDI and income for MENA countries," Cahiers du GRES, Groupement de Recherches Economiques et Sociales 2008-21, Groupement de Recherches Economiques et Sociales.
  7. Peter Nunnenkamp & Rudi Stracke, 2007. "Foreign Direct Investment in Post-Reform India: Likely to Work Wonders for Regional Development?," Kiel Working Papers 1375, Kiel Institute for the World Economy.
  8. Eckhardt Bode & Peter Nunnenkamp, 2007. "Does Foreign Direct Investment Promote Regional Development in Developed Countries? A Markov Chain Approach for US States," Kiel Working Papers 1374, Kiel Institute for the World Economy.
  9. David Mayer-Foulkes, 2005. "Development and Underdevelopment in the Globalizing Economy," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c010_005, DEGIT, Dynamics, Economic Growth, and International Trade.

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