Konstantin M. Waker

 

Abstract: Foreign direct investment is often promoted as a driver of economic growth, but its benefits are thought to depend on host countries’ ‘absorptive capacities’ such as human capital, financial development, trade openness, or institutional quality. This belief has shaped decades of international policy advice. We apply recent advances in panel data econometrics on a sample of about 120 countries over five decades to revisit this conventional wisdom. Our approach is the first in this literature that disentangles the effects of policy-relevant changes in absorptive capacities from time-invariant country fundamentals that policies cannot alter. We find that the latter dominate in explaining why FDI benefits some countries more than others. Among the four policy-relevant capacities examined, only greater trade openness plausibly enhances the FDI-growth nexus. And even in this case, fewer than 10% of countries fail to reach the threshold where FDI becomes growth-enhancing. By contrast, human capital, financial development, and institutional quality – long considered critical complements – do not robustly increase the benefits from FDI, and may even dampen them. These findings challenge the prevailing emphasis on broad absorptive capacity building to benefit from FDI.

 

 

 

 

 

 

– Séminaire organisé par le programme 4 / BSE –

 

 

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