The impact of foreign direct investment on productivity: New evidence for developing countries

Chengchun Li and Sailesh Tanna

Economic Modelling, 2019, vol. 80, issue C, 453-466

Abstract: We provide new empirical evidence on the relationship between inward foreign direct investment (FDI) and total factor productivity (TFP) growth using cross-country data for 51 developing countries over the period 1984–2010. Our results suggest a weak direct effect of FDI on TFP growth but, after accounting for the roles of human capital and institutions as contingencies in the FDI-TFP growth relationship, we find a robust FDI-induced productivity growth response dependent on these ‘absorptive capacities’. However, the relevance of the human capital contingency effect diminishes when the effect of institutions is also considered, which suggests that improving institutions is relatively more important than human capital development for developing countries to realise productivity gains from FDI.

Keywords: Foreign direct investment; Total factor productivity growth; Human capital; Institutions (search for similar items in EconPapers)
JEL-codes: D24 F21 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (42)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:80:y:2019:i:c:p:453-466

DOI: 10.1016/j.econmod.2018.11.028

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