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Information and communication technology and foreign direct investment: interactions and contributions to economic growth

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Abstract

This study explores the joint effect of FDI and domestic capital stocks (ICT and non-ICT) on productivity and economic growth, by incorporating two additions to the recent literature. Firstly, biases due to the fact that the observed measures of domestic capital stocks have an FDI component (double counting) are taken into account, and secondly, the possibility that the effect may be heterogeneous. Using semiparametric econometric techniques, the output elasticities for 15 OECD countries for the period 1980–2004 are estimated. The results indicate that biases do exist and they are significant. When corrected, the effects of all three types of capital are positive, significant, and they vary across countries and time. Furthermore, there exist interactions between the three capital variables, implying a complimentary relationship between domestic (ICT and non-ICT) and FDI capital. Additionally, the rates of return to FDI are high and heterogeneous, suggesting that in most countries, there is need for more investment.

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Notes

  1. In all specifications estimated, we append an error term. The error term is normally distributed with zero mean and constant variance.

  2. For a detailed description of the data see Pilat and Achreyer (2004) and Ketteni et al. (2007).

  3. Data are nonexistent regarding the sectoral distribution of FDI. OECD provides a sectoral distribution, nevertheless data are only available for ICT sectors (which are not directly comparable with ours) only for recent years, i.e., after 2000–2002.

  4. The share \(s\) differs across countries and time. On average, these shares (in total physical capital) are 0.89 and 0.11 for non-ICT and ICT capital, respectively.

  5. Given, constant returns to scale, OLS estimates of a production function in labor productivity form are free of simultaneity equation bias providing consistent estimates (see Mundlak 1996). In this case, any omitted variable issue (such as human capital) becomes a measurement issue in our dependent variable which does not alter the consistency of our estimates since it is included in the error and the \(\hat{A}\) term.

  6. Dummies are included in our analysis and testing for their joint significance cannot be rejected.

  7. Two other specifications have also be estimated. In particular we have estimated

    $$\begin{aligned} \hat{Y}&= \hat{A}+\theta _{L}\hat{L}+\theta _{P}\hat{P}^{*}+\theta _{I} \hat{I}^{*}+\theta _{F}\hat{F}\\ \hat{Y}-\hat{F}&= \hat{A}^{*}+\theta _{L}(\hat{L}-\hat{F})+\theta _{P}( \hat{P}^{*}-\hat{F})+\theta _{I}(\hat{I}^{*}-\hat{F}). \end{aligned}$$

  8. Details are available upon request.

  9. The rates of return to the three types of capital are calculated by \(\rho _{x}=(\varepsilon _{x}\frac{Y}{X})/q_{x,}(x=P,I,F)\), where \(\varepsilon _{x}\) is the output elasticity and \(q_{x}\) is the investment price deflator.

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Authors and Affiliations

  1. Frederick University, Nicosia, Cyprus

    Elena Ketteni

  2. Department of Economics, University of Pireaus, Pireaus, Greece

    Constantina Kottaridi

  3. Department of Economics, University of Cyprus, Nicosia, Cyprus

    Theofanis P. Mamuneas

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  1. Elena Ketteni
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  2. Constantina Kottaridi
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  3. Theofanis P. Mamuneas
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Correspondence to Elena Ketteni.

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Ketteni, E., Kottaridi, C. & Mamuneas, T.P. Information and communication technology and foreign direct investment: interactions and contributions to economic growth. Empir Econ 48, 1525–1539 (2015). https://doi.org/10.1007/s00181-014-0839-1

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