Does foreign direct investment advance growth and income convergence across countries? : research issues and methodology

Foreign direct investment is supposed to advance economic growth in countries, primarily by transferring technology. Since richer countries tend to have more advanced technology than poorer countries, fdi is also supposed to help poor and middling countries catch up to rich ones. Yet, according to evidence, fdi is not doing these things. // The absence of evidence favoring fdi may be due to a flaw in the empirical growth model that is used. That model is linear, forcing cross-country evidence to show that fdi affects growth and convergence the same way in all countries, regardless of individual circumstances. This does not fit with either theory or informal observation and case studies. // We will re-visit cross-country evidence on fdi with a new, partially non-linear, empirical model which allows growth to respond to its determinants differently in different countries. The new model identifies country thresholds in key explanatory variables, the minimum presence needed to affect the macroeconomy. It locates thresholds for initial income, needed to detect convergence, and fdi. // With the new empirical model we can begin to answer the following questions: _ Is a minimum amount of fdi needed in-country before it becomes an important factor in aggregate growth? _ Is a minimum level of development, initial income, needed before fdi becomes effective? _ Does effective fdi help developing countries catch up to rich ones