FOREIGN DIRECT INVESTMENT, PRODUCTIVITY SPILLOVERS AND LABOR QUALITY

Year 2012, Volume: 4 Issue: 1, 57 - 66, 01.06.2012

Cem Tintin

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

References

• Aghion Philippe and Howitt Peter (1992), “A Model of Growth through Creative Destruction”, Econometrica, Vol. 60, No. 2, pp. 323-351.
• Aghion Philippe and Howitt Peter (2009), The Economics of Growth, London: MIT Press.
• Arrow, Kenneth J. (1962), “The Economic Implications of Learning by Doing”, Review of Economic Studies, Vol. 29, No. 3, pp. 155-173.
• Bonthuis Boele (2010), “Measuring Labour Quality”, University of Groningen Working Paper. Broda
• Groundnuts to Globalization: A Structural Estimate of Trade and Growth”, NBER Working Paper, No. 12512.
• Buckley Peter, Clegg Jeremy and Wang Chengqi (2006), “Inward FDI and Host Country
• Transnational Corporations, Vol.15, No.1, pp.13-37. Evidence from China’s Electronics
• Industry”, Cecchini Laurence and Lai-Tong Charles (2008), “The Links Between Openness and Productivity in Mediterranean Countries”, Applied Economics, Vo. 40, No.6, pp. 685-697. Comin, Diego A. (2008), Total Factor Productivity, The New Palgrave Dictionary of Economics.
• Johansen Soren (1988), “Statistical Analysis of Cointegration Vectors” Journal of Economic Dynamics and Control, Vol.12, pp. 231-254.
• Johnson Andreas (2006), “The Effects of FDI Inflows on Host Country Economic Growth”, CESIS Electronic Working Paper Series 58.
• Lee Jaehwa (2009), “Trade, FDI, and Productivity Convergence: A Dynamic Panel Data Approach in 25 Countries”, Japan and the World Economy, Vol. 21, pp. 226-238. Ma Xiaohong (2009), “An Empirical Analysis on the Impact of FDI on China's Economic Growth”, International Journal of Business and Management, Vol. 4, No.6, pp. 76-80.
• Romer Paul (1986), “Increasing Returns and Long-Run Growth”, Journal of Political Economy, Vol. 94, No.5, pp. 1002-1037.
• Romer Paul (1990), “Endogenous Technological Change”, Journal of Political Economy, Vol. 98, No.5, pp. 71-102.
• Sargent Timothy C. and Rodriguez Edgard. R. (2000), “Labour or Total Factor Productivity: Do We Need to Choose?”, International Productivity Monitor, Vol. 1, pp. 41-44. Sasidharan Subash (2006), “Foreign Direct Investment and Technology Spillovers: Evidence from the Indian Manufacturing Sector”, SSRN Working Paper 881528.
• Sjöholm Fredrik (2008), “The Effect of FDI on Employment and Technology in China”, IFN Working Paper.
• Solow, Robert. M. (1956), “A Contribution to the Theory of Economic Growth”, Quarterly Journal of Economics, Vol. 70, No.1, pp. 65-94.
• Tica Josip and Druzic Ivo (2006), “The Harrod-Balassa-Samuelson Effect: A Survey of Empirical Evidence”, University of Zagreb, Working Paper Series No. 06-7/686.
• UNDP (2009), Human Development Report 2009: Overcoming barriers: Human Mobility and Development, New York and Geneva.