Diffusion of Technology via FDI and Convergence of Per Capita Incomes

Abstract

This chapter analyzes the convergence of incomes towards the FDI home country in Europe and in the MENA region, separately; and the prerequisites to derive benefit from FDI in a comparative manner. The per capita income convergence towards the major FDI home country, US, is estimated higher for Europe compared to the MENA region. However, the differences in the convergence values are not so wide between some sub-groups of these two regions. The absorptive capacity hypothesis, together with the investment capacity explains the discrepancies between not only the two regions as a whole, but also sub-groups within each region. The strong complementary effects between FDI and both absorptive and investment capacity suggest that economic policy aimed at fostering growth should try to benefit more from FDI by increasing the absorptive capacity-enhancing own R&D activities and promoting human capital- as well as by improving investment environment to attract more of it.