The role of the sectoral composition of foreign direct investment on growth

Abstract

In this paper we examine the differential effect of the primary, services, and manufacturing sector FDI on economic growth. The analysis explores whether the sectoral composition of the FDI inflows, alongside the amount of FDI flows, play a role in contributing to the host country's economic growth. Empirical analysis, using cross-country data between 1990 and 2003, shows that while the magnitude of FDI flows have a positive effect on economic growth the sector in which the FDI occurs is also important. As the share of the manufacturing sector in FDI flows increases there is a positive effect on economic growth. Whereas, as the share of primary or services sector investments increases there is a negative effect on economic growth. The results are robust to inclusion of different determinants of economic growth, panel analysis, and consideration of endogeneity.