Thursday, May 12, 2005

The Contribution of Foreign Capital to U.S. Productivity Growth

Economic alarmists, such as Lou Dobbs of CNN fame, continue to argue for sealing the U.S. borders to economic forces from abroad. However, Tourau and I recently completed a study that shows the folly of such actions. U.S. Bureau of Labor Statistics data show productivity growth since 1995 roughly doubling the rate achieved over the preceding two decades. A rapid inflow of foreign investment paralleled the surge in productivity growth, suggesting a positive link between the growth of productivity and foreign capital. The goal of our study was to investigative this relationship and determine the extent to which foreign capital contributed to nation’s rapid productivity growth during this period. Using industry panel data, we found that foreign capital accounted for none of the nation’s productivity growth between 1988 and 1994, but twenty-six percent of U.S. productivity gain from 1995 to 1999.

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