Foreign Direct Investment, Technology Diffusion, and Host Country Productivity Growth

The principal objective of this paper is to ascertain whether foreign direct investment (FDI) has statistically significant effects on host countries\u27 economic performance, such as total factor productivity. Such effects are often referred to as FDI externalities or spillover effects. This paper attempts to evaluate whether these spillover effects depend on the sending countries\u27 income levels. Our empirical analysis shows that FDI exerts positive impacts on less developed countries. Further, we determine that the impacts of FDI from developed countries are more prevalent. So-called North-South effects were confirmed; however, we do not detect South-South effects. We also investigated the other channel, imports, and demonstrate its significant impacts on total factor productivity. © 2011 by Asian Development Bank