The Long-run Relationship between Outward Foreign Direct Investment and Total Factor Productivity: Evidence for Developing Countries

Outward foreign direct investment (FDI) from developing countries has been growing significantly in both absolute and relative importance in recent years. Nevertheless, there is surprisingly little research on the home-country effects of outward FDI for these countries. This paper examines the long-run relationship between outward FDI and total factor productivity for a sample of 33 developing countries over the period from 1980 to 2005. Using panel co-integration techniques, we find that outward FDI has, on average, a robust positive long-run effect on total factor productivity in developing countries and that increased factor productivity is both a consequence and a cause of increased outward FDI.