Productivity Spillovers of FDI in the Manufacturing Sector of Mauritius. Evidence from A Dynamic Framework

Using a dynamic vector error correction model, catering for dynamic, endogeneity and causality issues, the present study addresses the important question of whether foreign direct investment in the manufacturing sector enhances the productivity of the sector in Mauritius using time series data for the period 1980-2010. The results show that FDI in the manufacturing sector has indeed contributed to both total factor productivity and labour productivity in the long run. Analysing the short run results, we found that FDI in the manufacturing sector continues to influence productivity but the impact is very small. This result was mainly explained by the massive relocation of foreign firms from Mauritius to cheap labour destinations. Also, the results confirm the presence of bi-causality and feedback effects in the FDI-Productivity relationship. Moreover, it also shows that FDI is positively related to the level of domestic investment suggesting the presence of “crowding in” effect as well.