The worldwide trade liberalization, globalization of commerce, and economic integration in the past three decades has led to a large literature on the effect of various open-economy factors on long-run growth.  One factor whose role in the growth process has received much attention has been foreign direct investment (FDI).  This subject has been studied extensively at both the theoretical and empirical levels (

Aitken and Harrison 1989; Bengoa and Sanchez-Robels 2003; Blomstrom, Zejan and Lipsey 1992; Borensztein, De Gregorio, and Lee, 1995; Lipsey 2002; Kohpaiboon, 2002; Nourzad 2008).  The general consensus appears to be that

FDI contributes to economic growth through several channels the most important of which is technology transfer. 

Independently of this body of work, another literature that is concerned with the effect of infrastructure capital on economic growth has developed beginning with the seminal work by Aschaurer (1989) (Canning and Pedroni 1999; Fernald 1999; Gramlich 1994; Holtz-Eakin 1994; Holtz-Eakin and Lovely 1996; Hulten and Schwab 1991; Hulten 1994; Munnell 1990; Nourzad 1995, 1998, 2000, 2001; Wang 2002, Wylie 1996).  The preponderance of evidence found in this literature suggests that public capital contributes significantly to long-run growth.

The present paper brings these two strands of research together by arguing that the growth effect of FDI depends, at least in part, on the recipient country’s infrastructure capital.  Increased public infrastructure capital has been found to increase the productivity of private domestic capital.  The same complementarity should also hold for foreign capital.  This hypothesis is tested using an annual panel of 10 or more countries over the period from 1977 through 2004.

Farrokh Nourzad

Economics Department

Marquette

Milwaukee, 

(414) 288-3570

farrokh.nourzad@marquette.edu

David Greenwold

Economics Department

Marquette

Milwaukee, 

(414) 288-3570

david.greenwold@marquette.edu