Foreign Direct Investment, International Knowledge Transfers, and Endogenous Growth: Time Series Evidence

Abstract

This paper proposes open- and closed-economy versions of an endogenous growth model to evaluate the impact of foreign direct investment (FDI) and international knowledge transfers and spillovers on the long-run growth rate of the recipient economy. In the open economy, foreign investors may engage in FDI, bond acquisition, or both, such that the portfolio composition of the foreign investor is shown to affect the effective rate of time preference of the recipient economy and hence its growth rate in the long run. the hypothesis of increasing returns due to FDI is tested for the five Latin American economies (Brazil, Mexico, Venezuela, Chile, and Columbia) that absorbed most of the FDI in the region in the 1970-91 period. Granger-causality between FDI and growth, and FDI and total factor productivity is also tested. The findings suggest that both open-economy peformance variables and domestic policy variables affect FDI and growth in the long run, which reinforces the conclusions of recent growth models that policy parameters affect growth rates endogenously.