The Effect of Bilateral Foreign Direct Investment Inflows on Income Convergence in Developed Countries

In this paper, the study examines the impact of economic globalization, in terms of increasing bilateral foreign direct investment inflows, on the convergence of income levels and economic growth rates between the United States and 18 OECD (organization for economic cooperation and development) countries from 1991 to 2010. For this analysis, the difference in income levels and economic growth rates in terms of per capita GDP (gross domestic product) are incorporated. The methodology uses ordinary least squares as well as time series approach, specifically in the framework of unit root and Johansen’s co-integration techniques. The results show that the per capita GDP and per capita GDP growth rate tend to converge as bilateral foreign direct investment inflows increases among them. The study also reveals that physical distance and common language had a meaningful role. These results might have something to do with similar socio-economic backgrounds and physical infrastructure among them and besides, with accession to the same financial systems and administrative institutions. As a result, these findings do provide sufficient evidence in favor of the convergence hypothesis.