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FDI Spillovers, Efficiency Change and Host Country Labor Productivity: Evidence from GCC Countries

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Abstract

This study contributes to the empirical literature by investigating the hypothesis that foreign direct investment (FDI) inflows yield positive productivity spillovers to Gulf Cooperation Council (GCC) countries during the period 1995-2011. Using Blundell–Bond dynamic panel Generalized Method of Moments (GMM) estimators, the main finding of dynamic panel data regressions shows that FDI inflows yield weak and negative productivity spillovers to GCC countries through its own or its interaction with host country absorptive capacity. In addition, the empirical results show that efficiency change (movements toward or away from the frontier) and political stability are the main factors that affect labor productivity growth in GCC countries. These results are consistent with previous single-country studies on technology transfer to developing countries.

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Notes

  1. For example, Saudi Arabia took eleventh place in the worldwide ranking of the ease of doing business (World Bank, 2011).

  2. Other previous studies on GCC countries focus only on the determinants of FDI. See for example, Gani and Albari (2013).

  3. The linkage of the labor productivity gap and income gaps between OECD and GCC countries could be an extension for another paper.

  4. Barro (1991) extensively examines the determinants of growth.

  5. To link labor productivity decomposition to growth accounting and assuming constant returns to scale (see Grosskopt et al. 2007) , we can write: αy = f(k, t), where α is the inefficiency, y is the output per worker, k is the capital labor ratio, and t is time. Following the growth accounting exercise, growth rates can be expressed by \( \widehat{y}={\widehat{f}}_t-\widehat{\alpha}+\frac{f_k}{f}\widehat{k} \), this equation gives us the tripartite decomposition of the labor productivity growth \( \left(\widehat{y}\right) \). In other words, labor-productivity growth is decomposed into three components: technical change (first term), efficiency change (second term), and the change in the capital labor ratio as a measure of capital deepening (third term).

  6. Some previous studies (e.g. Lu et al. (2006)) consider R&D as a one of the explanatory variables; where R&D is a “technology input” measure; it measures the innovation and imitation capabilities. R&D data is not available in all GCC countries except Kuwait and Saudi Arabia (World Bank 2013). The unavailability of R&D data does not allow us to investigate the role of government R&D as opposed to private R&D”.

  7. The non-stationary time-series can be transformed to stationary time-series by differencing. This can be done by using difference and system GMM estimators.

  8. See also Arellano and Bover (1995).

  9. Regression 1 suffers from the problem of too many instruments, which can weaken the Hansen test and yield probability value of 1.000 (Bowsher, 2002). This problem is solved in all other regressions by dropping the KD variable. Dropping the KD variable increases the number of groups from (4) to (6) groups (see the data table). With this in mind, regression (1) results should be interpreted with caution.

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Acknowledgments

The author would like to express his sincere thanks to the editor and anonymous referees for their comments on an earlier version of this paper. Errors, if any, are the author’s

See also Table 4, Appendix A.

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Authors and Affiliations

  1. Department of Economics and Finance, College of Business Administration, Gulf University for Science & Technology, West Mishref, Kuwait

    Khaled Elmawazini

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  1. Khaled Elmawazini
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Correspondence to Khaled Elmawazini.

Appendices

Appendix A

Table 4 FDI Inflows in GCC Countries
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Table 5 Research and Development Expenditures (% of GDP)
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Table 6 t Bar Test of IPS (2003) and Unit Root Test of Panel Data
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Table 7 GCC and OECD Countries
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Appendix B

Fig. 1
figure 1

Labor productivity in GCC and OECD Countries

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Elmawazini, K. FDI Spillovers, Efficiency Change and Host Country Labor Productivity: Evidence from GCC Countries. Atl Econ J 42, 399–411 (2014). https://doi.org/10.1007/s11293-014-9428-0

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