Foreign Capital, Human Capital and Efficiency: A Stochastic Frontier Analysis for Developing Countries

We use stochastic Frontier analysis to study which of the three channels of technology diffusion, foreign direct investment (FDI), imports of machinery and equipment, or imports of research and development (R&D) expenditures, affect the total factor productivity of developing countries. We also analyze whether a developing country’s openness to technology diffusion is affected by their existing levels of human capital. We find that FDI, imported capital goods, and imported R&D are all important channels for improving efficiency, as is human capital accumulation. However, the positive effect of FDI, imported capital goods, and imported R&D depends crucially on the level of accumulated human capital. In addition, we find that in the process of technology diffusion, the impact of formal education is more important for imported R&D than it is for imported capital and FDI, whereas the opposite is true for learning by doing, which is found to be more important for knowledge diffusion through FDI and imported capital.