Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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The Role of Foreign Direct Investment (FDI) in a Dualistic Growth Framework: An Application of Smooth Coefficient Semi-parametric Approach

Zeb Aurangzeb, Thanasis Stengos*

Last modified: 2012-07-10


This paper examines the relationship between Foreign Direct Investment (FDI) and economic growth. We extend the dualistic growth framework by Feder (1982), whereby we divide the economy into an exports and a non-exports sector and assume that the FDI is mainly entering the former. In order to empirically estimate the e¤ects of FDI on economic growth, we employ a smooth coe¢ cient semi-parametric approach. Our results show that countries with higher levels of FDI in.ows experience higher productivity in the exports sector as compared with those with low level of FDI in.ows. In general, we provide some evidence that FDI inflows play an important role during the development process: Initially, as an important determinant of growth, later on, by helping improve factor productivity in the exports sector and .nally, through spillover effcts due to fostering the linkages between the Multinational Corporations (MNC) and their host economy partners.

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