International Productivity Differences and Roles of Domestic Investment, FDI and Trade

Hiranya K. Nath, Sam Houston State University
Halis M. Yildiz, Ryerson University
Gouranga G. Das, Hanyang University

Abstract

This paper calculates Theil’s entropy index to measure the extent of productivity di¤erences across 92 countries for the period from 1970 to 2003. While there is evidence of increasing di¤erences in productivity across these countries, we observe di¤erent patterns when we group the countries by income levels. These di¤erences seem to have decreased among middle income developing and developed countries whereas they have widened among low and high income developing countries. Multivariate time series analysis results suggest that FDI increases productivity di¤erences among low and high income developing countries whereas domestic investment reduces these di¤erences among low income countries in the long-run. Granger causality test results indicate that while an increase in domestic investment slows down the growth of trade, a higher growth of trade attracts FDI to middle income countries. Furthermore, a reduction in productivity di¤erences and a higher FDI growth accelerate the growth of trade in developed countries.