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. 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.

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

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)?

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

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.

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)?

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).

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 …

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 ….

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?

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.