Attract FDI!- A universal golden rule?

In this paper we address the question whether FDI is an important channel for productivity catching-up or whether FDI itself is attracted by productivity growth. This has important implications for industrial policy measures as well as for specialisation structures and the de-velopment of comparative advantages over time. Our data set comprises detailed information on output, employment, wages, gross fixed capital formation, FDI inward stocks, exports and imports for OECD and non-OECD Eastern European and Asian countries over the time pe-riod 1981-2000 (varying for individual countries) for individual manufacturing industries. Using Granger causality tests we find evidence for the presence of endogeneity between FDI and out-put and productivity growth. Therefore, we estimate our empirical model in a system with the following endogenous variables: output, FDI, productivity gap, exports, imports, gross fixed capital formation and wages. Thus, we take account of indirect or second-round effects through trade flows, wages, and investment in a panel model. The results suggest a mutually reinforcing, positive relationship between FDI and output as well as productivity and export growth, whil