(Università degli Studi del Molise)

Despite the ability of the theoretical literature to highlight a large number of different channels through which foreign direct investment (FDI) can promote economic growth in the hosting country, the empirical literature has been much less successful in finding evidence that this is indeed the case. In this paper we provide some evidence confirming that FDI have a positive and statistically significant effect on the rate of growth of the recipient countries. Our major improvement with respect to the previous literature is the use of a panel of industry level data for different countries, so that we can account for all time-invariant unobserved characteristics by means of country and sector dummies. Our results reveal a strong, robust, economically and statistically significant effect of FDI on sector growth. Moreover, such effect is magnified in countries with a stronger financial system and in more technologically advanced sectors of economic activity. Finally, we also show that the growth enhancing effect comes primarily from an increase in the total factor productivity, and not from sheer capital accumulation, as suggested by some authors