Foreign Direct Investment and Convergence: A Nonparametric Production Frontier Approach

We decompose labor productivity growth into components attributable to technological change, technological catch-up, foreign capital deepening, domestic capital deepening, and human capital accumulation, thus separating the effects of foreign and domestic capital deepening on productivity growth and convergence. We apply nonparametric production-frontier methods to a worldwide 1980-2005 panel and find that (1) foreign capital accumulation, together with human capital accumulation, is the driving force for productivity growth and increasing international dispersion of productivity, (2) technological change is decidedly nonneutral, with most technological advancement taking place in foreign-capital-intensive countries, and (3) international polarization is brought about primarily by efficiency changes.