Monday, June 19, 2006

Blocking Foreign Investment Is a Mistake

Senate Banking Committee Chairman Richard Shelby, Republican from Alabama, is sponsoring yet another protectionist bill -- the Foreign Investment and National Security Act of 2006.

The bill, if ultimately passed, -- would add new barriers to the flow of foreign investment into the U.S.. The bill would reduce foreign direct investment which has been an important contributor to U.S. growth during the 1990s. My co-authors and I recently completed a study that will be published early next year examing the impact of foreign capital on U.S. productivity growth.

U.S. Bureau of Labor Statistics productivity data show output growth per hour since 1995 roughly doubling the rate achieved over the preceding two decades. A rapid inflow of foreign investment paralleled the growth in productivity, suggesting a positive link between the growth of productivity and foreign capital. The goal of this study is to investigative this relationship and determine the extent to which foreign capital contributed to U.S. productivity growth during this period of rapid productivity growth. Applying a Cobb-Douglas production function to data from 1988 to 1999, we found that foreign capital accounted for twenty-six percent of U.S. productivity growth between 1995 and 1999, but had little impact on productivity growth from 1988 to 1994.

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