Concepedia

Revisiting FDI-led growth hypothesis: the role of sector characteristics

Journal of International Trade & Economic Development · 2016 · 38 citations · 55 references

TL;DR

The impact of foreign direct investment on economic growth remains contested, with uncertainty about which types of FDI are effective. This study disaggregates FDI by technological characteristics to identify which types drive output growth. The authors classify FDI into ICT‑based, non‑ICT‑based, and other sectors and analyze their effects on output growth. The analysis shows that ICT‑based FDI promotes growth only when host countries possess adequate human capital, financial resources, and technological infrastructure, while non‑ICT and other sector FDI have no significant impact.

Abstract

Does foreign direct investment (FDI) lead to higher growth? What type of FDI really works? In this paper, we disaggregate FDIs based on their technological characteristics and investigate which kind of FDI leads to output growth. The results for the sample of OECD countries during the period 1985–2012 indicate that FDI inflows to Information and Communication Technologies (ICTs) using and producing manufacturing and service sectors (ICT-based), non-ICT using and producing manufacturing and service sectors (non-ICT-based) and other sectors (non-ICT-other) play no role in contributing to economic growth. However, we provide evidence that absorptive capacities of host countries work through ICT-based FDI inflows. Only if the host countries have sufficient level of human capital, financial resources and technological infrastructure, ICT-based FDI will foster economic growth. The results are robust to controlling missing values, studying the subsample of emerging market economies and consideration of endogeneity.