Economic, Institutional & Political Determinants of FDI Growth Effects in Emerging & Developing Countries

This study investigates the role of income levels, using the World Bank income classification, and political development, using EIU Democracy Index scores, in determining the magnitude of FDI growth effects for a panel of 61 emerging and developing countries for the period 1989 to 2013. It tests a baseline growth model incorporating these variables which is then extended to include FDI interaction effects with human capital, measured using secondary school enrolment data, and political development. The separate growth effects of FDI are then tested separately for each of the three lower World Bank income classifications (Upper-Middle, Lower-Middle and Low Income) followed by three categories of political regime type derived from Democracy Index. The effects of FDI are found to vary significantly between income classifications with the strongest growth effects in Low Income countries and weaker negative effects in Upper-Middle Income countries. The growth interaction effects between FDI and human capital are found to be strongly positive regardless of regime type. Political development in conjunction with FDI appears to suppress the growth effects of FDI in authoritarian countries while enhancing them in ‘hybrid’ democracies. For more democratic countries, human capital is a more important driver of growth than FDI but this is the outcome of strongly positive interaction effects between FDI and human capital outweighing negative effects for human capital on its own. The paper also provides some support for the view that a critical threshold of human capital is required to generate beneficial spillover growth effects from inflows of FDI. This paper provides new and more detailed insights into the growth effects of FDI with particular respect to income classification and political regime type in emerging and developing countries

The Impact of Foreign Technology & Embodied R&D On Productivity in Internationally-Oriented & High-Technology Industries in Egypt, 2006-2009

This paper investigates the domestic productivity and spillover effects of foreign technology and embodied R&D on Egyptian manufacturing industries, 2003 to 2009. It also analyses the heterogeneous sectoral effects of technology transfer by focusing specifically on the productivity effects on highly internationalised and technology intensive industries. These are expected to have greater absorptive capacity with respect to foreign technology and therefore greater productivity effects because of their greater exposure to foreign competition and greater technological capacity respectively. The study is the first to analyse the efficiency effects of foreign technology by classifying industries in this manner. The study finds that foreign technology and embodied R&D have positive and significant industry-specific effects on domestic productivity and TFP in technology intensive industries but these are weaker in internationally-oriented industries. The findings suggest that only the technological intensive industries in Egypt have sufficient absorptive capacity to assimilate foreign technology effectively. The paper’s findings highlight the key role of foreign technology in domestic productivity growth, subject to the absorptive capacity of the domestic labour force, and the need for improved policies to promote the domestic benefits of technology transfer through the accumulation of local technological competences

Heterogeneous Sectoral Growth Effects of FDI in Egypt

This paper is one of the first to investigate the sectoral dimension/perspective of FDI spillovers. It examines empirically the heterogeneous technology effects and efficiency gains of FDI across economic sectors in Egypt between 1990 and 2007. The results reveal many aspects of the aggregation bias of cross-country studies. In aggregate, inflows of FDI have no significant impact upon growth in Egypt; instead, growth is driven by government investment. The disaggregated analysis however, reveals that FDI has distinct sector-specific effects on the Egyptian economy that derive exclusively from investment in the Telecommunication & Information Technology. FDI in Services however, generates negative growth effects. The sectoral growth effects of FDI also depend upon the region of origin. Although the growth impact of FDI in Telecommunications from both the Middle East & North Africa (MENA) and Western economies is positive, the finding is primarily driven by investment from the latter nations. Further, there is some evidence to support the view that FDI into the Manufacturing & Petroleum sector from the MENA region has adverse growth effects. There is also limited evidence to suggest that ‘market-seeking’ Western (European and US) capital flows into the Services sector have conspicuous ‘crowding-out’ effects

Aggregate and Heterogeneous Sectoral Growth Effects of Foreign Direct Investment in Egypt

This paper investigates the sectoral impacts of FDI on growth in Egypt between 1990 and 2007 based upon a unique data set. It highlights the aggregation bias inherent in many empirical studies that focus solely on the economy-wide effects of foreign investment. Aggregate inflows of FDI are shown to be detrimental to the country’s economic growth performance, possibly as a result of the ‘crowding-out’ of more productive domestic investment. Some positive sector-specific effects however, are found for investment in Manufacturing & Petroleum, which also has beneficial spillovers into other sectors. FDI in the Finance & Retail and Telecommunications & Information Technology sectors are found to generate significantly negative growth effects while those in Services and Tourism are negative but generally insignificant. These findings suggest that ‘market-seeking’ FDI in certain sectors has conspicuous ‘crowding-out’ effects, possibly owing to insufficient domestic absorptive capacity. The results of this study further demonstrate the importance of potential sectoral heterogeneity of own sector and inter-sectoral economic growth effects of FDI. It therefore highlights the critical need for policy makers to take a more disaggregated sectoral-level evaluation of the benefits of foreign investment, particularly in developing economies such as Egypt