The impacts of export and Foreign Direct Investment on total factor productivity: evidence from cross country analysis

Abstract

We study the role of export and foreign direct investment on total factor productivity growth in a sample of both developed and developing countries from 1996 to 2009. We start by employing growth accounting exercise to estimate TFP growth of 103 countries and find out it determinants. We also provide a global picture about TFPG’s performance of countries in the world. By pointing out the limitations of previous researches that fail to take into account the potential of endogeneity between FDI and TFPG as well as export and TFPG, this thesis contributes to the current literature by developing two new instrumental variables for export and FDI to overcome endogeneity problem. Two new instrumental variable have proved their highly effectiveness in removing endogeneity bias. We carefully check the robustness of our findings by employing panel data techniques to reestimate the model that used in cross section exercise. We also employ one lagged value of FDI and export to control for problem of reversed causality running from TFPG to export and FDI. In empirical analysis, my research finds a robust and positive statistically significant association between export and TFP growth. The finding emphasizes the indispensable role of export in enhancing TFP growth. Interestingly, my thesis asserts the existence of negative linkage between FDI and TFPG. This finding is sharply contrasts with conventional wisdom of many people who think that FDI inflows will benefit for TFP growth. From policy perspective, we recommend that a sound macroeconomic stability, moderate government expenditure together with policies to foster export-oriented industries are always needed for a better performance in TFP growth. We also suggest that government should invest more in education to increase in quality and skill of human capital. Government also needs to spend more money in training programs for the workforce to learn how to apply advanced technology into production.