We find a curious negative casual relationship between foreign
direct investment (FDI) and total factor productivity growth (TFPG) across
the world for the period 1996-2009. The relationship is robust to specifications
in which we instrument for FDI using lagged values and geography variables as
well as when we control for country and year fixed effects, human capital, the
size of government, and other country differences. We hypothesize that not all
FDI are the same as channels for technology transfer. We find that higher
natural resource extraction accounts for the negative relationship between FDI
and TFPG. For countries with no natural resource exports, 10% higher FDI
causes 0.7-1.9% faster TFPG. The same 10% higher FDI, however, in countries
with 6% higher natural resource exports reduces TFPG by the same amount.
These findings have important implications for the middle-income trap and the
rise in FDI for natural resource extraction. As an illustrative example, in
Vietnam from 2003-2009, FDI in mining and quarrying grew at 135% per year
while TFPG in that sector averaged ?3%. In manufacturing, FDI grew at only
26% per year while TFPG averaged 24%.