Neil Dias Karunaratne, School of Economics Discussion Paper No. 465 June 2012, School of Economics, The University of Queensland. Australia.


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The role of FDI inflows and outflows to host countries and from the source countries emerged in the 1980s as the major vehicle technology transfer that accelerated the globalization or international integration of 25 leading OECD economies over a period of 25 years (1983-2007). Although neoclassical and endogenous growth theories provide unequivocal support for FDI flows because they generate positive externalities or spillover effects through channels of GDP growth, capital formation and R&D, the empirical evidence in support of these claims are mixed. The panel data econometrics performed using a new multiplicatively complete index of total factor productivity provide fresh insights on the cross-border FDI generated through technology transfer and other channels. The empirical findings for the OECD countries are markedly different from the spillover effects on developing countries that are plagued by technology absorptive capacity effects due to the operation of threshold effects of underdeveloped human capital resources. The empirics on cross-border FDI flows and the spillover effects that they generate in OECD countries will provide much needed information to design and implement policies to harness the net benefits from cross-border FDI flows in much more productive manner than undertaken hitherto.