Empirical Studies in Trade, Foreign Investment and Economic Performance

Although the theoretical literature suggests that countries with a strong outward orientation register a faster pace of economic progress relative to those that are inwardly oriented, the empirical evidence is mixed. This thesis re-examines the empirical relationship between outward orientation and economic growth using innovative methodologies drawn from the production frontiers literature and timeseries econometrics. Outward orientation is defined as openness to trade and foreign investment. A key difference between this thesis and the current literature is that the former distinguishes between technology and efficiency externalities of outward orientation and also considers the potential linkages between various channels of outward orientation. The thesis is organized as a collection of three independent empirical studies. In the first study, the efficiency component of productivity growth is isolated, and the effects of trade and inward and outward foreign investment on efficiency is examined; different forms of foreign investment – direct, portfolio and other foreign investment are distinguished. A sample of 20 OECD countries covering the period 1988-2000 is applied in the analysis. In the second study, ‘inefficiency free’ measurements of technology gap are computed. Through second stage regressions of the technology gap measure on trade and foreign direct investment, the effects of outward orientation on technology are gauged. A larger panel dataset of 63 countries covering the period 1982-2000 is applied in this study. The third study, using quarterly data from Australia over the period 1988-2003, evaluates the growth effects of outward orientation while providing for systematic interactions between various types of trade and foreign investment. In addition to the empirical studies, the thesis also includes two literature review chapters: one on the linkages between trade, foreign investment and economic growth, and the other on the use of production frontier methods in macroeconomic applications.