Revisiting FDI-led growth hypothesis: the role of sector characteristics

• Published in: The journal of international trade & economic development Vol. 25; no. 8; pp. 1144 - 1166
• Main Authors: Gönel, Feride, Aksoy, Tolga
• Format: Journal Article
• Language: English
• Published: London Routledge 01.12.2016; Taylor & Francis Ltd
• Subjects: Absorptive capacity; Economic growth; Economic reform; Foreign direct investment; Foreign investment; Hypotheses
• ISSN: 0963-8199; 1469-9559
• DOI: 10.1080/09638199.2016.1195431

Does foreign direct investment (FDI) lead to higher growth? What type of FDI really works? In this paper, we disaggregate FDIs based on their technological characteristics and investigate which kind of FDI leads to output growth. The results for the sample of OECD countries during the period 1985-2012 indicate that FDI inflows to Information and Communication Technologies (ICTs) using and producing manufacturing and service sectors (ICT-based), non-ICT using and producing manufacturing and service sectors (non-ICT-based) and other sectors (non-ICT-other) play no role in contributing to economic growth. However, we provide evidence that absorptive capacities of host countries work through ICT-based FDI inflows. Only if the host countries have sufficient level of human capital, financial resources and technological infrastructure, ICT-based FDI will foster economic growth. The results are robust to controlling missing values, studying the subsample of emerging market economies and consideration of endogeneity.