Growth and the quality of foreign direct investment: is all FDI equal?

Laura Alfaro and Andrew Charlton

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this paper we distinguish different “qualities” of FDI to re-examine the relationship between FDI and growth. We use ‘quality’ to mean the effect of a unit of FDI on economic growth. However this is difficult to establish because it is a function of many different country and project characteristics which are often hard to measure Hence, we differentiate “quality FDI” in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.

Keywords: foreign direct investment; economic growth; industry data; spillovers; instrumental variables (search for similar items in EconPapers)
JEL-codes: F23 F36 F43 O40 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2007-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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http://eprints.lse.ac.uk/19666/ Open access version. (application/pdf)

Related works:
Working Paper: Growth and the Quality of Foreign Direct Investment: Is All FDI Equal? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:19666

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