LONG RUN EQUILIBRIUM RELATIONSHIP BETWEEN INWARD FDI AND PRODUCTIVITY

By constructing a panel dataset from nine OECD countries for the period 1971-1999 and adopting up-to-date panel cointegration estimation methods, the paper shows the robustness of long run positive relationship between inward foreign direct investment and productivities of host countries. Especially, with group mean fully modified OLS, the estimation model allows common time dummies to control possible cross-sectional dependence and also allows heterogeneous cointegrating vectors for the members of cross section. The paper also confirms the long run equilibrium relationship between domestic knowledge stocks and productivities in G7 countries.