FDI and Total Factor Productivity Relations: An Empirical Analysis for BRIC and Turkey

AbstractForeign direct investment (FDI) has been one of the important subject of the world economy during the last three decades. FDI have both direct and indirect influence on economic development. Foreign direct investment can effect economy directly by increasing gross fixed capital formation and indirectly like increase information level of domestic firms and competion. Foreign direct investment (FDI) is a source of both capital, new technology and intangibles such as organisational and managerial skills. However, the empirical evidence in the literature in support of this recommendation for sample of developing countries is not unanimous.In this study, a panel data approach is used to study the effects of FDI on Total Factor Productivity in a sample of 5 countries BRIC and Turkey. We have implemented a statistical descriptive model that allows us to say that FDI has a negative impact on TFP for these countries.Keywords: Total Factor Productivity, Foreign Direct Investment, Panel Data.(ProQuest: ... denotes formulae omitted.)IntroductionIt is clear that technical progress is a main factor in economic productivity enhancement. It is a fact that most developed countries have high productivity level because of that innovation and new technologies are created in. The main channels for technology transfer for developing countries are FDI and international trade, especially the inflow of FDI is one of the most frequently treated as economic catholicons. The capital inflows contribute to more outputs, the higher level of technology and knowledge used by multinational corporations (MNCs) can usually spill over to local firms and also FDI brings new methods of production and improve productivity by more competition into the economy. At the same time FDI brings more employment capacity to country and improves the general wellfare of the society.This paper estimates the effect of FDI to TFP of BRIC and Turkey and whether FDI have had an impact on TFP for the period 1990-2012. The evidence of the positive impact of FDI on TFP would provide one potential justification for the new developing countries that attract inward FDI and would generate important policy implications for their strategies.Theoretical framework and Review of LiteratureAs the majority of FDI comes from industrialized countries, it is understandable that developing countries try to attract FDI, in order to get more advanced technology. Indeed, most developing countries make attracting foreign investors as one of the key elements of their economic policy. Economic theory has identified a number of channels through which openness to international financial flows could raise productivity growth. However, while there is a vast empirical literature analyzing the impact of financial openness on output growth, far less attention has been paid to its effects on productivity growth. The impact of FDI on domestic productivity studies deal on local firms can increase their effectiveness by imitating foreign firms manufacturing way or domestic firms can be under presure of competition from foreign companies in order to continue their activities and increase efficiency. Increase in competition due to FDI cause domestic firms to be more productive by investing to physical and human capital or importing new technology.7' 8The theoretical and practical studies in the economics literature often voiced that the differences of economic growth of countries depend on the basis of capital accumulation or technological diffusion. FDI maintains its importance as one of the basic channels for achieving the advanced technology in terms of technology transfer for less developed and developing countries. FDI can facilitate the transfer of technology and business information to less developed countries. FDI not only transfers the capital but also a strong mechanizm that brings productivity by tmas fering technologgy and know-how. …