Kiel Working Papers, Kiel Institute for World Economics
No 1242:
Do Multinational Enterprises Contribute to Convergence or Divergence? A Disaggregated Analysis of US FDI
David Mayer-Foulkes and Peter Nunnenkamp
Abstract: It is a widely held belief that foreign direct investment
(FDI) has a positive effect on economic growth. We test this hypothesis by
performing convergence regressions derived from a model of endogenous
technological change. We estimate the rate of growth in per-capita income,
relative to the per-capita income of the United States, in terms of US FDI,
human development, financial development, and trade. We apply a panel
approach, instrumenting for explanatory variables and correcting for
correlated errors by clustering by countries. The heterogeneity of FDI is
taken into account by considering various FDI-related activities – in
addition to the conventionally used FDI stocks and flows. Furthermore, we
draw on industry-specific FDI data, rather than exclusively on aggregated
data. Our empirical analysis puts into question the currently prevailing
euphoria about FDI as a means to induce economic catching-up processes of
developing countries. We conclude that the central challenge facing
policymakers is not to attract FDI, but to improve the local conditions
required to benefit from the widely perceived unique advantages of FDI. In
addition, our findings support the proposition that FDI stocks do not
adequately reflect FDI-related economic activities.
Keywords: foreign direct investment, heterogeneity of FDI, growth effects, convergence regressions; (follow links to similar papers)
JEL-Codes: F23,; O40; (follow links to similar papers)
50 pages, May 2005
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