The impact of foreign direct investment on productivity: New evidence for developing countries

Chengchun Li, Sailesh Tanna

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We provide new empirical evidence on the relationship between inward foreign direct investment (FDI) and total factor productivity (TFP) growth using cross-country data for 51 developing countries over the period 1984-2010. Our results suggest a weak direct effect of FDI on TFP growth but, after accounting for the roles of human capital and institutions as contingencies in the FDI-TFP growth relationship, we find a robust FDI-induced productivity growth response dependent on these ‘absorptive capacities’. However, the relevance of the human capital contingency effect diminishes when the effect of institutions is also considered, which suggests that improving institutions is relatively more important than human capital development for developing countries to realise productivity gains from FDI.
Original languageEnglish
Pages (from-to)453-466
Number of pages14
JournalEconomic Modelling
Early online date1 Dec 2018
Publication statusPublished - 1 Aug 2019

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in Economic Modelling. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Economic Modelling, [80], (2019) DOI: 10.1016/j.econmod.2018.11.028

© 2019, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International


  • Foreign direct investment
  • Human capital
  • Institutions
  • Total factor productivity growth

ASJC Scopus subject areas

  • Economics and Econometrics


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