A note on labour productivity and foreign inward direct investment

Abstract

Foreign direct investment (FDI) is not only a transfer of capital, but a complex bundle of capital and firm-specific assets. In particular, the transfer of production know-how improves overall productivity of FDI-receiving firms and to some extent also that of the other firms due to spillovers. The present note uses a small panel of Austrian manufacturing sectors and investigates this hypothesis empirically. In a flexible CES-framework, general and labour-augmenting productivity improving effects of inward FDI are found. Thus, the job creation potential of FDI highlighted in previous studies is likely to be overestimated.