US foreign investments: Technology transfer, relative backwardness, and the productivity growth of host countries

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The Quarterly Review of Economics and Financ NP21
Our study investigates the impact of US foreign investments on total factor productivity (TFP) growth, controlling for the innovation capability of host countries, for a large dataset of 61countries from 1988 to 2017. Using the panel system GMM approach, our study presents some interesting findings. First, we reveal that foreign direct investment (FDI) has a negative effect on the productivity growth of all host countries. This finding suggests that FDI does not necessarily enhance the productivity growth of host countries. We also use R&D expenditures of multinational companies (MNEs) as an alternative for FDI to filter out any supplementary effects in technology transfer. The results indicate a negative R&D effect on the productivity growth of OECD countries and a positive effect on developing countries. We also find that the technology gap, when measured as labor productivity, only enhances the TFP growth of OECD countries, but when it is measured as innovation capability, the technology gap is found to decrease TFP growth in developing countries. These findings contrast against the theoretical assumption that a large technology gap (relative backwardness) increases the TFP growth of host countries.