Title: Foreign direct investment and total factor productivity growth: does distance from technology frontier matter?

Authors: Subaran Roy

Addresses: Abu Dhabi School of Management, Salam St. & 31st St., P.O. Box 6844 Abu Dhabi, UAE

Abstract: We investigate the effects of the important channel of technology diffusion namely foreign direct investment (FDI) on the total factor productivity (TFP) growth. We contribute to the literature by empirically investigating the role of initial distance of a country from the technology frontier in determining the net effect of FDI on TFP growth. In this study, we find that the net effect of FDI on TFP growth decreases with the increase in distance. In order to take this research a step further, we implement the threshold regression technique to explore the nonlinearity associated with FDI. Our findings suggest that if initial distance of a country exceeds a threshold level then the leader will have a locomotive effect and can pull the followers along, while in the other situation there is a significant negative impact of FDI that increases with distance as a result of which the net benefit from FDI can be miniscule.

Keywords: foreign direct investment; FDI; economic growth; threshold distance; total factor productivity; TFP; technology diffusion.

DOI: 10.1504/GBER.2016.075527

Global Business and Economics Review, 2016 Vol.18 No.2, pp.151 - 176

Received: 24 Mar 2014
Accepted: 01 Oct 2014
Published online: 28 Mar 2016 *

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