FDI, openness and income

Ting Gao

Journal of International Trade & Economic Development, 2004, vol. 13, issue 3, pages 305-323

Abstract: This is an empirical study of the impact of foreign direct investment (FDI) on income. It presents cross-country evidence that inward FDI is positively correlated with income. In addition, an instrument for FDI is constructed to address the issue of endogeneity. The results show that instrumental-variables (IV) estimates of the impact of FDI on income are positive and greater than OLS estimates, similar to the findings on trade in Frankel and Romer (1999) . The evidence in this paper suggests that inward FDI contributes to higher income, and favours the argument of Irwin and Terviö (2002) that trade openness is subject to measurement error - in particular, trade is an imperfect proxy for many income-enhancing interactions between countries.

Keywords: Foreign Direct Investment; Openness; Income; Growth; Ols; Instrumental Variables (search for similar items in EconPapers)
Date: 2004
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