From FDI to economic complexity: a panel Granger causality analysis

• Published in: Structural change and economic dynamics Vol. 56; pp. 225 - 239
• Main Authors: Antonietti, Roberto, Franco, Chiara
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.03.2021
• Subjects: economic complexity; foreign direct investment; panel Granger causality; panel VAR; panel VAR; F21; C23; F23; O19; economic complexity; panel Granger causality; foreign direct investment; O33
• ISSN: 0954-349X; 1873-6017
• DOI: 10.1016/j.strueco.2020.11.001

•We analyze the impact of inward FDI on countries’ economic complexity•We use a panel Granger causality and a panel VAR approach•Inward FDIs Granger cause economic complexity, and not viceversa•The short-run impact of FDI on economic complexity is very small•Knowledge-intensive greenfield FDI Granger cause economic complexity in developing countries In this paper, we assess whether attracting higher amounts of FDI induces a greater level of economic complexity in a country. Using a panel of 117 countries and 22 years, from 1995 to 2016, we test for the causal relationship between inward FDI and economic complexity using a panel VAR approach and Impulse Response Functions. We find that accumulating a higher stock of inward FDI per capita Granger-causes a greater economic complexity in a country, and not vice versa. This causal effect is very small, however, and occurs only in countries with above-average levels of GDP per capita, tertiary education, tertiarization or financial development. We also find that only greenfield FDIs Granger-cause economic complexity in developed countries. Finally, knowledge-intensive greenfield projects are the only type of FDI that Granger-cause complexity in a less developed country, but the estimated effect is near zero and disappears after two years.