FDI and Capital Formation in Developing Economies: New Evidence from Industry-level Data
We contribute to the long debated issue of whether inward foreign direct investment (FDI) can stimulate investment in developing countries by introducing a novel measure of FDI, based on industry-level data. Our results suggest a positive impact of FDI on total investment – measured as the ratio of gross fixed capital formation to GDP – but only if multinational enterprises engage in manufacturing production; the same does not hold for other business activities. Moreover, we find evidence of a more beneficial impact of foreign investors from advanced economies compared to developing ones. Our results are robust to alternative measures of FDI, as well as to instrumental variable approaches accounting for the potential endogeneity of FDI.
We gratefully acknowledge the comments received from Andrea F. Presbitero, Farid Toubal, Amelia Santos-Paulino and participants in the IMF/CFD Conference on “Financing for Development”, Geneva, April 2015, and the “Economics of Global Interactions” conference, Bari, September 2015, and the Second International Conference on New Structural Economics, Beijing, December, 2015, and the UNIDO Conference on “Quality FDI, Growth and Development”, Vienna, September 2016. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.