MNC-borne FDI, absorptive capacity and economic growth: an empirical investigation
Date
2011-10-28
Authors
Nhamo, Senia
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Abstract
The liberalization of FDI is deepening, so have the incentive schemes put in place by a
number of countries. Investment promotion agencies in these countries are seen to be
actively promoting their countries as the best locations for foreign direct investment
(FDI). With FDI emerging as a fovourite source of capital for most countries, profound
questions about the true value of FDI to host countries are addressed in this study. While
incentive packages may be justified on the basis of incomplete internalization of FDI
benefits by foreign firms, it still remains critical to establish whether these benefits
(spillovers) are substantive. As an attempt to answer these questions, this dissertation
uses both firm level and country level data to investigate the effects of foreign direct
investment (FDI) on productivity and economic growth.
The first part of the study uses cross sectional firm level data to investigate whether
foreign firms are more productive than domestic firms. We further examine whether there
are any significant productivity spillovers from foreign to domestic firms or not. SIn the
second part, focus is on country level analysis which uses both time series and panel data
techniques. In the time series analysis we use the recent Toda-Yamamoto causality
testing framework to determine the direction of causality between FDI and growth for
three groups of countries: developing, emerging and developed countries. This is
followed by fixed effects and dynamic panel data analyses for the 37 countries (9
developing, 12 emerging and 16 developed) where we test for absorptive capacity effects.
Our findings show that results are determined to a great extent by the method of analysis.
Interesting findings emerge from this study. The firm level data revealed the importance
of multinational corporations in improving domestic firm productivity. With this finding,
we anticipate these results to filter through the macro system and show up in the time
series and panel data analyses. In the case of developing economies, productivity
differences between domestic and foreign firms are confirmed only where the definition
of FDI is below the full ownership level. Positive but statistically insignificant spillovers
are found in the developing country sample. From the emerging economy sample, we
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find neither significant productivity differences nor related spillovers from foreign to
domestic firms. With regards to developed economies, as in the case of emerging
economies, there are no statistically significant productivity differences between
domestic and foreign firms. Interestingly, for this sample, positive and highly significant
spillovers from foreign to domestic firms are documented.
The Toda Yamamoto Granger causality framework shows unidirectional causality from
FDI to GDP in Colombia, Egypt and Zambia. These results suggest that in these three
countries, we have a case of growth enhancing FDI. There is also evidence of causality
which runs from GDP to FDI in China, Indonesia, France, Japan, Spain and the United
Kingdom. This is a case where higher levels of economic activity attract foreign direct
investment. We also find evidence of bi-directional causality for Argentina, Kenya and
Thailand. No clear cut relationship between FDI and growth is established in the rest of
the countries: Brazil, Chile, Ghana, India, Jordan, Madagascar, Malawi, Morocco, South
Africa and all but four of the developed economies.
The dynamic panel data analysis for the developing economy sample reveals positive
effects between FDI and economic growth. A key finding from this is the negative impact
of financial development, an absorptive capacity measure. This unexpected result raises
the possibility of international capital flows becoming more harmful to developing
economies when extensive development of the domestic financial sector makes it
difficult to regulate financial transactions of relatively esoteric financial contracts. This
evidence there should be a nuanced embrace of financial globalization by developing
economies. In the emerging economy analysis, the roles of openness of the economy and
financial development as absorptive capacity indicators are elevated.
Overall, the dynamic analysis shows a largely negative and statistically insignificant
effect of FDI on economic growth. For developed economies, we find that negative
effects of FDI on economic growth are encountered at both the minimum and mean levels
of openness. This suggests that for developed economies, a level of openness above the
mean value would be ideal for economic growth to be realized through FDI.
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Corroborating our findings with the work of other scholars, we conclude that our results
are complementary. It appears that the contradictions inherent in the FDI-Growth
literature could be partly due to methodological differences.
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Keywords
Multinational corporations, Foreign direct investment, Economic growth, Productivity