FDI and Growth: What Cross-Country Industry Data Say

The theoretical literature has discussed different channels through which foreign direct investments (FDI) promote host country’s economic growth, but empirical analyses have so far been inconclusive. In this paper we provide evidence that FDI have a positive and statistically significant growth effect in recipient countries, using a panel of 14 manufacturing sectors for (a sample of) developed and developing countries over the period 1992 - 2004. Moreover, we find that this effect is stronger in capital intensive and in technologically advanced sectors, highlighting the importance of sector characteristics. We find that the growth enhancing effect comes primarily from an increase in total factor productivity (TFP) and from capital accumulation. FDI not only contribute to physical capital accumulation, but also generate positive technological spillovers. Our results are robust to the inclusion of other determinants of economic growth. We also address the issue of potential endogeneity and results are confirmed. Policy implications of our findings are important, especially for developing countries, where the growth enhancing promotion of foreign investment in capital intensive and technologically advanced sectors is at the heart of the debate.