Internationals Knowledge Spillovers Through Trade And FDI In Developing Countries: Role Of Governance

Abstract

International knowledge spillovers are considered among the important external sources of knowledge that improve domestic factor productivity. Several studies have identified international trade and foreign direct investment as a channel for international knowledge spillovers. Arguably, for catching up, international knowledge spillovers are relatively more valuable for developing countries than developed ones. Yet, studies on international knowledge spillovers in developing countries are scarce. Moreover, literature on institutional economics suggests that institutions in developing countries are not as tightly knitted, up to date, and smoothly functioning as in developed countries which might affect the ability of the economy to extract and absorb knowledge from external sources. Therefore, this study examines the relationship of import-related spillovers and FDI-related spillovers with total factor productivity in developing countries. It also examines the moderating role of governance in the transmission of knowledge from imports and FDI to total factor productivity. Subject to data availability, different data sources are combined to reach a sample of 37 developing countries for the period 2007-2019. Fixed effects model has been used for estimations and it is confirmed that import-related and FDI-related spillovers have a positive and significant impact on total factor productivity in developing countries. Results also reveal that the relationship between importrelated spillovers and total factor productivity is stronger in countries that have higher regulatory quality. It is also found that human capital moderates the relationship between international spillovers and total factor productivity when adjusted for quality.