Does the Impact of the Foreign Direct Investment on Labor Productivity Change Depending on Productive Capacity?

Sanjoy Kumar Saha ()
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Sanjoy Kumar Saha: Mawlana Bhashani Science and Technology University

Journal of the Knowledge Economy, 2024, vol. 15, issue 2, No 139, 8588-8620

Abstract: Abstract The study employs system GMM to derive the benchmark impact of foreign direct investment (FDI) on labor productivity (LP) as well as the interactive effects of FDI and productive capacity index (PCI) while dynamic panel threshold technique is used to determine the threshold level of PCI. Later to check the sensitivity test, pooled mean group (PMG) methodology is applied. Using panel data from 88 countries from 2000 to 2018, we examine the effect of FDI on LP contingent on the level of PCI across two economic sectors: tradables and nontradables. Applying novel PCI, the findings demonstrate that initially FDI exacerbates LP in the above two sectors, and the improvement in PCI from FDI diminishes this detrimental impact until a threshold of PCI, and then beyond that level, FDI enhances LP. Meanwhile, the latter benefit is larger in the tradable sector than in the nontradable sector, and this beneficial effect is amplified by increased FDI inflows. A set of robustness tests were performed to corroborate the findings. Notably, the internal mechanism of PCI’s eight indicators moderates the influence of FDI on LP. The study has a significant disadvantage as it spans 19 years (from 2000 to 2018). Since PCI data is not accessible before 2000 and after 2018, we have limited the investigation to this time period. The study applies novel PCI, a wide category index, to assess the host countries’ absorption capacity. Furthermore, according to our knowledge, this is the first attempt to assess the impact of FDI on LP in tradable and nontradable sectors, as well as to determine the PCI threshold level at which the effect of FDI switches direction. Policy implications of this study reveal that, while FDI may not directly increase LP, PCI-backed FDI growth may imply an increase in LP. The study presents policy considerations to enable the potential role of PCI indicators in facilitating the beneficial role of FDI on LP to increase competitiveness of the host economies.

Keywords: Labor productivity; Productive capacity; Tradable sector; Nontradable sector; Service; Threshold (search for similar items in EconPapers)
JEL-codes: F21 F4 F66 L63 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s13132-023-01444-0

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