Technology diffusion and host-country productivity in South-South FDI flows

•This paper investigates the effects of FDI on the host country's economic performance.•In addition, the paper examines whether spillover effects depend on the home country's income level.•Our empirical results confirm the North-South effects but provide no evidence of South-South effects.

This paper investigates the effects of foreign direct investment (FDI) on the host country's economic performance, namely, its total factor productivity (TFP). Such effects are often referred to as FDI externalities or spillover effects. In addition, the paper examines whether such spillover effects depend on the home country's income level. Our empirical findings indicate that FDI flows have positive effects on less developed countries (South countries), and that the effect of FDI flows from the developed countries (North countries) is stronger than that from less developed countries. That is, these results confirm the so-called North-South effects but provide no evidence of South-South effects. Furthermore, another channel of spillover effects is imports, which have significant effects on TFP.