From FDI to economic complexity: a panel Granger causality analysis

In this paper, we assess whether attracting higher amounts of FDI induces a greater level of economic complexity in a country. Using a panel of 117 countries and 22 years, from 1995 to 2016, we test for the causal relationship between inward FDI and economic complexity using a panel Granger causality approach. We also estimate the short-run relationship between these two factors using a panel vector autoregressive model and an impulse response function approach. We find that accumulating a higher stock of inward FDI per capita Granger-causes a greater economic complexity in a country, and not vice versa. This causal effect is very small, however, and occurs only in countries with above average levels of GDP per capita, tertiary education, tertiarization or financial development. Looking at the FDI entry mode, we find that only greenfield FDIs Granger-cause economic complexity in developed countries, whereas mergers and acquisitions have no such effect. Finally, we find that knowledge-intensive greenfield projects are the only form of inward FDI that Granger-cause complexity in a less developed country, but the estimated effect is near zero and disappears after two years.