FDI, productivity and financial development

Date
2009
Authors
Alfaro, L.
Ozcan, S. K.
Sayek, S.
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Source Title
World Economy
Print ISSN
0378-5920
Electronic ISSN
1467-9701
Publisher
Wiley-Blackwell Publishing Ltd.
Volume
32
Issue
1
Pages
111 - 135
Language
English
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Abstract

This paper examines the effect of foreign direct investment (FDI) on growth by focusing on the complementarities between FDI inflows and financial markets. In our earlier work, we found that FDI is beneficial for growth only if the host country has well-developed financial institutions. In this paper, we investigate whether this effect operates through factor accumulation and/or improvements in total factor productivity (TFP). Factor accumulation - physical and human capital - does not seem to be the main channel through which countries benefit from FDI. Instead, we find that countries with well-developed financial markets gain significantly from FDI via TFP improvements. These results are consistent with the recent findings in the growth literature that shows the important role of TFP over factors in explaining cross-country income differences. © 2009 The Authors Journal compilation © 2009 Blackwell Publishing Ltd.

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