Diffusion of Technology and Convergence of Income among Countries

Theoretical models of growth reveal that either exogenous or endogenous, technology is the main driving force behind the long-run economic growth. Furthermore, in the endogenous growth framework, diffusion of technology is the basic mechanism of per capita income convergence among countries. This paper analyzes the per capita income convergence implications of foreign direct investment (FDI), considering that the latter is an international technology diffusion channel. Although FDI appears to be an important channel in the diffusion of technology models theoretically, empirical evidence related to the effect of FDI on growth is ambiguous. By applying the approach of Ben-David (1996), which focuses on convergence among countries grouped with respect to their mutual trade, this paper presents evidence that per capita income convergence exists among FDI home and host countries using three different convergence measures. The relatively higher speed of convergence prevailed among countries linked by FDI justifies the technological spillovers accompanied by FDI and provides evidence that FDI inflow is a mechanism of per capita income convergence among countries by allowing the diffusion of technology.