IDEAS home Printed from
   My bibliography  Save this article

FDI, Productivity and Financial Development


  • Laura Alfaro
  • Sebnem Kalemli-Ozcan
  • Selin Sayek


This paper examines the effect of foreign direct investment (FDI) on growth by focusing on the complementarities between FDI inflows and financial markets. In our earlier work, we found that FDI is beneficial for growth only if the host country has well-developed financial institutions. In this paper, we investigate whether this effect operates through factor accumulation and/or improvements in total factor productivity (TFP). Factor accumulation - physical and human capital - does not seem to be the main channel through which countries benefit from FDI. Instead, we find that countries with well-developed financial markets gain significantly from FDI via TFP improvements. These results are consistent with the recent findings in the growth literature that shows the important role of TFP over factors in explaining cross-country income differences. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.

Suggested Citation

  • Laura Alfaro & Sebnem Kalemli-Ozcan & Selin Sayek, 2009. "FDI, Productivity and Financial Development," The World Economy, Wiley Blackwell, vol. 32(1), pages 111-135, January.
  • Handle: RePEc:bla:worlde:v:32:y:2009:i:1:p:111-135

    Download full text from publisher

    File URL:
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Rosanne Altshuler & Harry Grubert & T. Scott Newlon, 2000. "Has U.S. Investment Abroad Become More Sensitive to Tax Rates?," NBER Chapters,in: International Taxation and Multinational Activity, pages 9-38 National Bureau of Economic Research, Inc.
    2. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
    3. Davies, Ronald B., 2003. "Tax Treaties, Renegotiations, and Foreign Direct Investment," Economic Analysis and Policy, Elsevier, vol. 33(2), pages 251-273, September.
    4. di Giovanni, Julian, 2005. "What drives capital flows? The case of cross-border M&A activity and financial deepening," Journal of International Economics, Elsevier, vol. 65(1), pages 127-149, January.
    5. H. Hanson, Gordon, 2005. "Market potential, increasing returns and geographic concentration," Journal of International Economics, Elsevier, vol. 67(1), pages 1-24, September.
    6. Bruce A. Blonigen & Ronald B. Davies, 2002. "Do Bilateral Tax Treaties Promote Foreign Direct Investment?," NBER Working Papers 8834, National Bureau of Economic Research, Inc.
    7. Bruce A. Blonigen & Ronald B. Davies, 2004. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(5), pages 601-622, September.
    8. Céline Azémar & Rodolphe Desbordes & Jean-Louis Mucchielli, 2007. "Do tax sparing agreements contribute to the attraction of FDI in developing countries?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(5), pages 543-562, October.
    9. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    10. Desbordes, Rodolphe & Vicard, Vincent, 2009. "Foreign direct investment and bilateral investment treaties: An international political perspective," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 372-386, September.
    11. Karolina Ekholm & Rikard Forslid & James R. Markusen, 2007. "Export-Platform Foreign Direct Investment," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 776-795, June.
    12. Ronald B. Davies, 2004. "Tax Treaties and Foreign Direct Investment: Potential versus Performance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(6), pages 775-802, November.
    13. Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2207-2223, September.
    14. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Investment in the European Union," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 959-972, November.
    15. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, vol. 51(5), pages 1303-1325, July.
    16. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, vol. 140(1), pages 260-281, September.
    17. Gordon, Roger H. & Hines, James Jr, 2002. "International taxation," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995 Elsevier.
    18. Michael Keen & Jenny Ligthart, 2006. "Incentives and Information Exchange in International Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(2), pages 163-180, May.
    19. Henry Louie & Donald Rousslang, 2008. "Host-country governance, tax treaties and US direct investment abroad," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(3), pages 256-273, June.
    20. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
    21. Vibhas Madan, 2000. "Transfer prices and the structure of intra-firm trade," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 53-68, February.
    22. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-465, June.
    23. Peter Egger & Mario Larch & Michael Pfaffermayr & Hannes Winner, 2006. "The impact of endogenous tax treaties on foreign direct investment: theory and evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 901-931, August.
    24. Hines, James Jr., 1994. "Credit and deferral as international investment incentives," Journal of Public Economics, Elsevier, vol. 55(2), pages 323-347, October.
    25. Daniel Millimet & Abdullah Kumas, 2007. "Reassessing the Effects of Bilateral Tax Treaties on US FDI Activity," Departmental Working Papers 0704, Southern Methodist University, Department of Economics.
    26. Janeba, Eckhard, 1996. "Foreign direct investment under oligopoly: Profit shifting or profit capturing?," Journal of Public Economics, Elsevier, vol. 60(3), pages 423-445, June.
    27. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-471, June.
    28. Norback, Pehr-Johan, 2001. "Multinational firms, technology and location," Journal of International Economics, Elsevier, vol. 54(2), pages 449-469, August.
    29. Kelly Edmiston & Shannon Mudd & Neven Valev, 2003. "Tax Structures and FDI: The Deterrent Effects of Complexity and Uncertainty," Fiscal Studies, Institute for Fiscal Studies, vol. 24(3), pages 341-359, September.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Access and download statistics


    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:bla:worlde:v:32:y:2009:i:1:p:111-135. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.