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Productive Capacities in Developing Countries: Does Foreign Direct Investment Matter?

The importance of productive capacities has been emphasized by various international organisations over the last decade. Many authors have focused their analysis on human capital and liberalisation as determinants, while often overlooking Foreign Direct Investment. We perform an analysis on Foreign Direct Investment and productive capacities using a recent dataset from Henn, Papageorgiou and Spatafora (2013) covering 35 years and 73 countries.Based on trade flows, the most complete and reliable source of data on production across countries, the dataset provides several proxies accounting for productive capacities. Our estimates, obtained from a dynamic panel analysis, suggest that FDI have a significant and positive impact on both economic diversification and sophistication, and thus that FDI lead to improved productive capacities. Estimates are consistent after running numerous robustness checks including various models and proxies.