Productivity Spillovers Through Foreign Transactions: The Role of Sector Composition and Local Conditions

We analyze the roles of inward foreign direct investment (FDI) and imports of capital goods as the main drivers of technology diffusion and productivity improvement in a sample of twenty-eight developing economies for the period 1999-2009. We examine changes in the sectoral composition of FDI as well as those local conditions that may facilitate technology adoption. Our results, obtained by the system generalized method of moments estimation method, suggest that the change of FDI from manufacturing to services is productivity enhancing. We also find that those countries with stronger institutions and better social and human development enjoy larger efficiency gains.