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‘Attract FDI!’ — A universal golden rule? Empirical evidence for OECD and selected non-OECD countries

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Abstract

In this paper we investigate the host-country effects of foreign direct investment (FDI). We extend the abundant existing literature on this topic in three ways. First, we explicitly acknowledge a potential endogeneity in the relationship between a country's economic performance (measured by labour productivity) and FDI by estimating a system of simultaneous equations. Second, we consider direct and additional indirect effects, which can be tracked through the system of equations when deriving our conclusions. Third, we base our estimations on a sample including OECD as well as selected non-OECD countries for seven manufacturing industries over the period 1981–2000. The results suggest a positive relationship between FDI and output as well as productivity and export growth, whereas there is also evidence for a downward pressure on wage growth as a result FDI. However, the magnitude of effects is surprisingly small.

Abstract

Dans cet article nous étudions les effets des investissements directs étrangers (IDE) sur le pays d’accueil. Nous aprofondissons la litérature existante sur le sujet de trois façons: premièrement, nous admettons explicitement une endogénéité potentielle dans la relation entre la performance économique d’un pays (mesurée par la productivité du travail) et les IDE, en estimant un système d’équations simultanées. Deuxièmement, nous prenons en compte dans la conclusion, les effets directs et les effets additionnels indirects dont on peut suivre la trace à travers le système d’équations. Troisièmement, nous basons nos estimations sur un échantillon incluant aussi bien des pays de l’OCDE que des pays non membres de l’OCDE, pour sept industries manufacturières, sur la période 1981–2000. Les résultats suggèrent une relation positive entre les IDE et la production ainsi que la productivité et la croissance des exportations, alors qu’il y a, par ailleurs, des preuves d’une pression à la baisse sur la croissance des salaires due aux IDE. Cependant, l’ampleur des effets est curieusement faible.

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Acknowledgements

This research was financed by the Oesterreichische Nationalbank (OENB) through the Jubiläumsfondsprojekt No. 10214 on ‘Stylised Facts of Foreign Direct Investment and their Implications on Economic Development’. The research was carried out while Julia Woerz was staff economist at the Vienna Institute for International Economic Studies (wiiw). We would like to thank the participants at the 3rd RTN workshop on ‘Trade, Industrialization and Development’, 27 January 2006, Florence, Italy; the JVI Research Seminar in ‘Macroeconomic and Structural Issues’, February 2006, Vienna, Austria; the DIME workshop on ‘Knowledge, International Specialisation and the Competitiveness of Europe’, 2–4 February 2006, Vienna; the NOEG conference, 5–6 May 2006, Vienna; the European Trade Study Group (ETSG) 2006 conference in Vienna and at the GARNET workshop on ‘FDI-led Innovation, Transfer and Dissemination of Knowledge, and their Multilateral Global and Regional Regulation’, 3–5 May 2007, Oslo, Norway, for valuable comments. A referee provided further useful comments and suggestions.

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Correspondence to Robert Stehrer.

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Stehrer, R., Woerz, J. ‘Attract FDI!’ — A universal golden rule? Empirical evidence for OECD and selected non-OECD countries. Eur J Dev Res 21, 95–111 (2009). https://doi.org/10.1057/ejdr.2008.1

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