The authors would like to thank Holger Görg and two anonymous referees for comments and suggestions. They are also grateful to Refet Gurkaynak for providing them with the data on TFP.
FDI, Productivity and Financial Development
Version of Record online: 30 JAN 2009
© 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd
The World Economy
Volume 32, Issue 1, pages 111–135, January 2009
How to Cite
Alfaro, L., Kalemli-Ozcan, S. and Sayek, S. (2009), FDI, Productivity and Financial Development. World Economy, 32: 111–135. doi: 10.1111/j.1467-9701.2009.01159.x
- Issue online: 30 JAN 2009
- Version of Record online: 30 JAN 2009
This paper examines the effect of foreign direct investment (FDI) on growth by focusing on the complementarities between FDI inflows and financial markets. In our earlier work, we found that FDI is beneficial for growth only if the host country has well-developed financial institutions. In this paper, we investigate whether this effect operates through factor accumulation and/or improvements in total factor productivity (TFP). Factor accumulation – physical and human capital – does not seem to be the main channel through which countries benefit from FDI. Instead, we find that countries with well-developed financial markets gain significantly from FDI via TFP improvements. These results are consistent with the recent findings in the growth literature that shows the important role of TFP over factors in explaining cross-country income differences.