FDI and Capital Formation in Developing Economies: New Evidence from Industry-level Data Authors

We contribute to the long debated issue of whether inward foreign direct investment (FDI) can stimulateinvestment in developing countries by introducing a novel measure of FDI, based on industry-leveldata. Our results suggest a positive impact of FDI on total investment – measured as the ratio of grossfixed capital formation to GDP – but only if multinational enterprises engage in manufacturing production;the same does not hold for other business activities. Moreover, we find evidence of a more beneficialimpact of foreign investors from advanced economies compared to developing ones. Our results arerobust to alternative measures of FDI, as well as to instrumental variable approaches accounting forthe potential endogeneity of FDI