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

  • David Mayer-Foulkes
  • Peter Nunnenkamp

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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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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  1. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  2. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2004. "The Effects of Financial Development on Convergence: Theory and Evidence," DEGIT Conference Papers c009_021, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
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  11. Holger Görg & David Greenaway, 2004. "Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?," World Bank Research Observer, World Bank Group, vol. 19(2), pages 171-197.
  12. Howitt, Peter & Mayer-Foulkes, David, 2005. "R&D, Implementation, and Stagnation: A Schumpeterian Theory of Convergence Clubs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(1), pages 147-77, February.
  13. Manuel R. AGOSIN & Ricardo MAYER, 2000. "Foreign Investment In Developing Countries, Does It Crowd In Domestic Investment?," UNCTAD Discussion Papers 146, United Nations Conference on Trade and Development.
  14. Bruce A. Blonigen & Miao Wang, 2004. "Inappropriate Pooling of Wealthy and Poor Countries in Empirical FDI Studies," Working Papers and Research 0903, Marquette University, Center for Global and Economic Studies and Department of Economics.
  15. 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.
  16. Lant Pritchett, 1997. "Divergence, Big Time," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 3-17, Summer.
  17. Xu, Bin, 2000. "Multinational enterprises, technology diffusion, and host country productivity growth," Journal of Development Economics, Elsevier, vol. 62(2), pages 477-493, August.
  18. Dutt, Amitava Krishna, 1997. "The pattern of direct foreign investment and economic growth," World Development, Elsevier, vol. 25(11), pages 1925-1936, November.
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