Re‐examining the impact of sectoral‐ and industrial‐level FDI on growth: Does institutional quality, education levels and trade openness matter?

Hazwan Haini and Pauline Tan

Australian Economic Papers, 2022, vol. 61, issue 3, 410-435

Abstract: This study examines whether institutional quality, education levels and trade openness affect the relationship between sectoral‐ and industrial‐level foreign direct investment (FDI) inflows and economic growth. Previous studies highlight the heterogeneous effects of FDI at the sectoral‐ and industrial‐level suggesting the need to examine the growth effects of FDI at a disaggregated level. However, previous studies have not empirically explored the role of absorptive capacities at the industrial‐ and sectoral‐level. Consequently, using a sample of 36 Organisation for Economic Co‐operation and Development countries from 2000 to 2019, we examine the relationship using the system generalised method of moments estimator to control for endogeneity. Our results show that the magnitudinal effects of overall FDI is dampened as sectoral‐ and industrial‐effects are not considered. We find that both manufacturing and services FDI contributes to growth. However, the effect of manufacturing FDI is greater. Meanwhile, we find education levels to be an effective moderator for services FDI, while trade openness enhances the growth effects of manufacturing FDI more effectively. Institutional quality is shown to have a positive complementary effect across both sectors and certain industries. Policy implications are discussed.

Date: 2022
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https://doi.org/10.1111/1467-8454.12253

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