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FDI and technology diffusion in developing countries:the role of human capital and institutions

This paper examines the impact of inflows of foreign knowledge on economic development, in the context of different institutional development and differing levels of human capital. We employ threshold regression analysis based on Hansen (2000) to determine whether there is cross-country heterogeneity in the flows of foreign knowledge from advanced industrialised countries to a group of 57 developing countries based on the latter group’s absorptive capacity and institutional quality over the period 1970-1998. In contrast to previous researchers employing this framework we examine two channels of international knowledge spillovers, namely trade and FDI. Initial results for the trade channel show that the differing productivity effects accruing to groups of countries as a result of differing levels of absorptive capacity and institutional quality are small at best and non-existent at worst.