Multinational investments and product sophistication

In this paper, we show evidence that increasing per capita stocks of foreign direct investment has a significant positive effect on the quality of exports of developing countries. To study the quality variations, we use two recently developed panels of cross-country quality indexes by Feenstra and Romalis (2014) and Hallak and Schott (2011), as well as the traditional method of looking at the variations of U.S. import prices from 135 countries for the period 1989-2004. A positive and significant effect of per capita FDI stocks on host country export quality is noted for the developing nations using all these methods. The study has important policy implications for developing countries, showing that accumulating foreign direct investment has enabled many developing countries in the last two decades to improve their export sophistication, as demonstrated by Hallak and Schott (2011).