Year: 2011
Type: book
Abstract: The liberalization of FDI is deepening, so have the incentive schemes put in place by a \nnumber of countries. Investment promotion agencies in these countries are seen to be \nactively promoting their countries as the best locations for foreign direct investment \n(FDI). With FDI emerging as a fovourite source of capital for most countries, profound \nquestions about the true value of FDI to host countries are addressed in this study. While \nincentive packages may be justified on the basis of incomplete internalization of FDI \nbenefits by foreign firms, it still remains critical to establish whether these benefits \n(spillovers) are substantive. As an attempt to answer these questions, this dissertation \nuses both firm level and country level data to investigate the effects of foreign direct \ninvestment (FDI) on productivity and economic growth. \nThe first part of the study uses cross sectional firm level data to investigate whether \nforeign firms are more productive than domestic firms. We further examine whether there \nare any significant productivity spillovers from foreign to domestic firms or not. SIn the \nsecond part, focus is on country level analysis which uses both time series and panel data \ntechniques. In the time series analysis we use the recent Toda-Yamamoto causality \ntesting framework to determine the direction of causality between FDI and growth for \nthree groups of countries: developing, emerging and developed countries. This is \nfollowed by fixed effects and dynamic panel data analyses for the 37 countries (9 \ndeveloping, 12 emerging and 16 developed) where we test for absorptive capacity effects. \nOur findings show that results are determined to a great extent by the method of analysis. \nInteresting findings emerge from this study. The firm level data revealed the importance \nof multinational corporations in improving domestic firm productivity. With this finding, \nwe anticipate these results to filter through the macro system and show up in the time \nseries and panel data analyses. In the case of developing economies, productivity \ndifferences between domestic and foreign firms are confirmed only where the definition \nof FDI is below the full ownership level. Positive but statistically insignificant spillovers \nare found in the developing country sample. From the emerging economy sample, we \niii \nfind neither significant productivity differences nor related spillovers from foreign to \ndomestic firms. With regards to developed economies, as in the case of emerging \neconomies, there are no statistically significant productivity differences between \ndomestic and foreign firms. Interestingly, for this sample, positive and highly significant \nspillovers from foreign to domestic firms are documented. \nThe Toda Yamamoto Granger causality framework shows unidirectional causality from \nFDI to GDP in Colombia, Egypt and Zambia. These results suggest that in these three \ncountries, we have a case of growth enhancing FDI. There is also evidence of causality \nwhich runs from GDP to FDI in China, Indonesia, France, Japan, Spain and the United \nKingdom. This is a case where higher levels of economic activity attract foreign direct \ninvestment. We also find evidence of bi-directional causality for Argentina, Kenya and \nThailand. No clear cut relationship between FDI and growth is established in the rest of \nthe countries: Brazil, Chile, Ghana, India, Jordan, Madagascar, Malawi, Morocco, South \nAfrica and all but four of the developed economies. \nThe dynamic panel data analysis for the developing economy sample reveals positive \neffects between FDI and economic growth. A key finding from this is the negative impact \nof financial development, an absorptive capacity measure. This unexpected result raises \nthe possibility of international capital flows becoming more harmful to developing \neconomies when extensive development of the domestic financial sector makes it \ndifficult to regulate financial transactions of relatively esoteric financial contracts. This \nevidence there should be a nuanced embrace of financial globalization by developing \neconomies. In the emerging economy analysis, the roles of openness of the economy and \nfinancial development as absorptive capacity indicators are elevated. \nOverall, the dynamic analysis shows a largely negative and statistically insignificant \neffect of FDI on economic growth. For developed economies, we find that negative \neffects of FDI on economic growth are encountered at both the minimum and mean levels \nof openness. This suggests that for developed economies, a level of openness above the \nmean value would be ideal for economic growth to be realized through FDI. \niv \nCorroborating our findings with the work of other scholars, we conclude that our results \nare complementary. It appears that the contradictions inherent in the FDI-Growth \nliterature could be partly due to methodological differences.
Author: Senia Nhamo
Language: English
Subfield: Strategy and Management
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2256635746