Foreign direct investment, informality and technology transfer

Foreign direct investment (FDI) is generally associated with technology transfer as well as the diffusion of technology and know-how in host countries. In this paper we first show that this is true only in countries where the informal sector is relatively small. After establishing this empirical fact, we incorporate FDI, informality, and technology transfer into a multi-country dynamic general equilibrium model and estimate key model parameters using some cross-country micro- and macro-level evidence. We then use the calibrated model to quantify the quantitative impact of varying informal sector size on technology transfer through FDI.