Does FDI increase productivity? The role of regulation in upstream industries

Sotiris Papaioannou () and Sophia Dimelis ()
Authors registered in the RePEc Author Service: Kostadis J. Papaioannou

The World Economy, 2019, vol. 42, issue 4, 1012-1031

Abstract: In view of substantial changes having taken place in the regulatory environment and in the light of the increasing role of inter industry linkages, we examine whether the total factor productivity (TFP) growth impact of foreign direct investment (FDI) is determined by regulation in upstream sectors. Econometric estimates illustrate that FDI exerts a positive impact on the growth of OECD industries which slows down as upstream regulation rises. To raise the reliability of our estimates, we use instruments for FDI and regulation that are as free as possible of endogenous association with TFP growth. Our instrumental variable estimates verify that the influence of FDI on TFP growth depends negatively on the level of upstream regulation. Non‐parametric estimates confirm that the highest impact of FDI takes place at the lowest levels of entry regulation and public ownership.

Date: 2019
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