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Claudio Bravo-Ortega Department of Economics Universidad de Chile June 2005

Comments on “Do Multinational Enterprises Contribute to Convergence or Divergence? A Disaggregated Analysis of US FDI” D. Mayer-Foulkes and P. Nunnecamp. Claudio Bravo-Ortega Department of Economics Universidad de Chile June 2005. General Comments. Acknowledgement to the authors.

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Claudio Bravo-Ortega Department of Economics Universidad de Chile June 2005

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  1. Comments on “Do Multinational Enterprises Contribute to Convergence or Divergence? A Disaggregated Analysis of US FDI”D. Mayer-Foulkes and P. Nunnecamp Claudio Bravo-Ortega Department of Economics Universidad de Chile June 2005

  2. General Comments • Acknowledgement to the authors. • Very interesting topic and extremely important for developing countries. • The paper is based in a very significant amount of work. • Not easy task to put together such amount of information and results.

  3. General Comments • However, I will suggest to the authors to review their empirical section that at times is really hard to follow.

  4. Results • Main result: FDI does not contribute to convergence (strongest result, to emphasize). • Developing countries do not benefit from FDI. Just high income countries do. • Robustness: to interact FDI and human capital (absorptive capacity). • How does this paper’s results relate to the one’s of Aghion et al (2005)?

  5. General Comments • The paper follows the methodology developed by Aghion, Howitt and Mayer-Foulkes (2005). • Growth regression. • Income with respect to the US. • Interaction term between FDI and Income, and FDI stand alone. • Allows to identify the effects on convergence and positive or negative effects of FDI on growth

  6. General Comments • In some aspects the analysis based on the interaction term is similar to the one of Borensztein, De Gregorio and Lee (1998),(0.52 sec.school attainment, most of their sample). • …Mayer-Foulkes et al. very different results and implications.

  7. Empirical Methodology • Estimation methodology is missing (GMM, fixed effects, random effects?). • Capital Data can be easily extended up to 2000, following Nehru and Dhareshwa (1993). • Openness and Penn World Tables 6.1. • Life expectancy as proxy of human capital. Why not to use direct measures as those available in Barro and Lee (2000)?

  8. Empirical Methodology • Some endogeneity issues. • Initial Income (endogenous by construction) Why not to use Arellano and Bond (1991) or Arellano and Bover (1995). • DCapital not instrumented. Results could be biased (Table 5).

  9. Empirical Methodology • In Table 6 the exclusion of capital generates larger coefficients and more significant….would this mean that excluding it we have omitted relevant variable…if irrelevant there shouldn’t be any change…

  10. Empirical Methodology • Instruments used, it seems that they predict just constant values for variables that change over time. • Private credit->Legal origin dummies • US FDI->Geographic variables (Why not to add population?) • Openness to trade->value in 1958, for developing countries, is this a good instrument? • Life Expectancy-> value in 1962….

  11. Empirical Methodology • The usage of legal origin dummies precludes the use of fixed effects in the first stage regression (perfect colinearity-> then fixed effects could not be recovered). • But is it reasonable to estimate a growth regression without fixed effects?

  12. Conclusions • I think that improving a little the econometric methodology would make of the paper a major contribution to the debate of whether FDI is good for developing countries having very important implications in the design of public policies.

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