FOREIGN DIRECT INVESTMENT, PRODUCTIVITY SPILLOVERS AND LABOR QUALITY

Abstract

This study investigates whether there are productivity spillovers stemming from Foreign Direct Investment (FDI) in developed and developing countries over the period 1984-2008. The study uses two productivity measures: labor and total factor productivity. The study employs panel cointegration and panel estimation methods. The panel cointegration test results indicate that there are long-run relations between FDI and productivity variables. The study’s main findings reveal that FDI triggers labor productivity in a significant way. However, in use of the total factor productivity variable, the effect of FDI on productivity is found too limited. Moreover, the magnitudes of the FDI effect on productivity differ remarkably across developed and developing countries. The findings also testify that the effects of FDI on productivity are higher in countries with high quality of labor force, which is measured by the labor quality index of Bonthuis (2010).

Keywords

• Foreign Direct Investment, Productivity Spillovers, Labor Quality, Panel Data

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