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Can FDI Be Bad for Growth?

Author

Listed:
  • Quan Minh Quoc Binh

    (Vietnam Netherlands Programme)

  • Nguyen Trong Hoai

    (University of Economics, Ho Chi Minh City)

  • Pham Hoang Van

    (Baylor University)

Abstract

We ?nd a curious negative casual relationship between foreign direct investment (FDI) and total factor productivity growth (TFPG) across the world for the period 1996-2009. The relationship is robust to speci?cations in which we instrument for FDI using lagged values and geography variables as well as when we control for country and year ?xed e?ects, human capital, the size of government, and other country di?erences. We hypothesize that not all FDI are the same as channels for technology transfer. We ?nd that higher natural resource extraction accounts for the negative relationship between FDI and TFPG. For countries with no natural resource exports, 10% higher FDI causes 0.7-1.9% faster TFPG. The same 10% higher FDI, however, in countries with 6% higher natural resource exports reduces TFPG by the same amount. These ?ndings have important implications for the middle-income trap and the rise in FDI for natural resource extraction. As an illustrative example, in Vietnam from 2003-2009, FDI in mining and quarrying grew at 135% per year while TFPG in that sector averaged -3%. In manufacturing, FDI grew at only 26% per year while TFPG averaged 24%.

Suggested Citation

  • Quan Minh Quoc Binh & Nguyen Trong Hoai & Pham Hoang Van, 2013. "Can FDI Be Bad for Growth?," Working Papers 10, Development and Policies Research Center (DEPOCEN), Vietnam.
  • Handle: RePEc:dpc:wpaper:1013
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    More about this item

    Keywords

    TFP growth; export; FDI; middle-income trap;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • Q37 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Issues in International Trade

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