Growth effects of U.S. FDI in 64 developing economies, 1980 – 2007: The role of absoptive capabilities

Both theoretical and empirical literatures have identified several channels through which FDI influence economic growth in developing countries. This study however examines the growth effects of U.S. FDI in 64 developing countries over the period 1980-2006. We also measure the strength of host countries “absorptive capabilities” to adopt and adapt the foreign technology from an advanced country like U.S. The relative differences in factor endowments between the U.S. and individual host countries along with economic and institutional policy reforms are used as absorptive capabilities in this study. Using aggregate production function augmented with U.S. FDI inflows, policy reforms, factor endowment differences and their interactions with U.S. FDI demonstrate that: (a) irrespective of capability level, an increase in the stock of U.S. FDI effects output growth positively. (b) After controlling for omitted variable and endogenity bias using IV method, the upward bias of growth effects of U.S. FDI came down from an excess of 7% to 4%. (c) The results with respect to absorptive capabilities are mixed. While the beneficiary effects of U.S. FDI are stronger in countries reforming economy and institutions, we could not find significant results for dissimilarity in endowments leading to costlier technology transfers from U.S. (d) Furthermore, the growth effects of U.S. FDI are positively significant in post cold war period to pre-cold war era. Similarly, in post cold war period, the growth effects of U.S. FDI are strongly positive and significant in Asia and Latin countries, while the same couldn’t be found for Africa neither in 1980s nor in 1990s.