Does Foreign Direct Investment Drive Technological Upgrading?

SummaryThis paper evaluates whether inward foreign direct investment stimulates technological upgrading, and if its impact depends on an economy’s level of social capability. FDI inflows exert a positive influence on technological upgrading over a lengthy time period for a large and diverse sample of countries. This effect is conditioned by an economy’s level of social capability, as well as its income. Among poor countries the effect of FDI on upgrading is bolstered for those endowed with higher levels of social capability. The effect of FDI on upgrading in rich countries remains positive but is weaker, and social capability exerts little disparate influence among these similarly socially capable economies.