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On the Role of Absorptive Capacity: FDI Matters to Growth

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Author Info
Yuko Kinoshita ()
Chia-Hui Lu ()

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Abstract

The paper studies the effects of foreign direct investment (FDI) on economic growth when sufficient provisions of infrastructure is a pre-requisite. In the overlapping generations setting, we show that technology spillovers via FDI take place only when the host country has the sufficient level of infrastructure. Infrastructure has a subsequent positive feedback on further investment which leads the country to grow faster. If infrastructure falls short of the critical level, however, then FDI has little effect on growth as the country is trapped in a lowgrowth equilibrium. We also present the simulations and empirical results based on panel data for 42 developing countries between 1970 and 2000. They support the model that FDI and infrastructure are complementary in affecting per capita GDP growth.

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Publisher Info
Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number wp845.

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Date of creation: 01 Nov 2006
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Handle: RePEc:wdi:papers:2006-845

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Related research
Keywords: foreign direct investment; economic growth; technology diffusion; infrastructure;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes
H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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  1. Keller, Wolfgang, 1996. "Absorptive capacity: On the creation and acquisition of technology in development," Journal of Development Economics, Elsevier, vol. 49(1), pages 199-227, April. [Downloadable!] (restricted)
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  4. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August. [Downloadable!] (restricted)
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  6. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March. [Downloadable!] (restricted)
    Other versions:
  7. 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. [Downloadable!] (restricted)
    Other versions:
  8. 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. [Downloadable!] (restricted)
  9. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December. [Downloadable!] (restricted)
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  10. Durham, J.B.J. Benson, 2004. "Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth," European Economic Review, Elsevier, vol. 48(2), pages 285-306, April. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. Findlay, Ronald, 1978. "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, MIT Press, vol. 92(1), pages 1-16, February. [Downloadable!] (restricted)
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    Other versions:
  14. Luis Serven & César Calderon, 2004. "The Effects of Infrastructure Development on Growth and income," Econometric Society 2004 Latin American Meetings 173, Econometric Society. [Downloadable!]
  15. Ari Kokko & Ruben Tansini & Mario Zejan, 1994. "Productivity spillovers from FDI in the Uruguayan manufacturing sector," Documentos de Trabajo (working papers) 0194, Department of Economics - dECON. [Downloadable!]
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  16. Sourafel Girma, 2005. "Absorptive Capacity and Productivity Spillovers from FDI: A Threshold Regression Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(3), pages 281-306, 06. [Downloadable!] (restricted)
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  17. Kohpaiboon, Archanun, 2002. "Foreign Trade Regime and FDI-Growth Nexus : A Case Study of Thailand," Departmental Working Papers 2002-05, Australian National University, Economics RSPAS. [Downloadable!]
  18. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
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  20. Giovanni Peri, 2004. "Catching-Up to Foreign Technology? Evidence on the "Veblen-Gerschenkron" Effect of Foreign Investments," NBER Working Papers 10893, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  21. repec:cup:etheor:v:8:y:1992:i:1:p:113-19 is not listed on IDEAS
  22. Haddad, Mona & Harrison, Ann, 1993. "Are there positive spillovers from direct foreign investment? : Evidence from panel data for Morocco," Journal of Development Economics, Elsevier, vol. 42(1), pages 51-74, October. [Downloadable!] (restricted)
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    Other versions:
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