Foreign direct investment and structural transformation of exports

Sizeable efforts are invested across the globe in attraction of foreign investors. These activities are motivated with theoretical predictions and empirical evidence from numerous countries on beneficial effects of foreign direct investment (FDI) on host economy. Among spillover channels of FDI, one that is particularly important for open economies is improvement of export competitiveness and productivity. Through knowledge and technology transfer, integration in parent company distributor and supplier network and horizontal and vertical spillovers to other firms in host economy FDI can ease access to international market for producers from host economy but more importantly the sophistication of their exported goods and services. The objective of this paper is to explore how FDI influences structural transformation of exports (improvement in export sophistication) in short and long run of almost 100 world economies. Evidence reveals differences in export sophistication between different groups of countries and point to beneficial effect of FDI on export sophistication.