Working Paper No. 03-12

U.S. Affiliates, Infrastructure and Growth: A Simultaneous Investigation of Critical Mass
Derek K. Kellenberg
October 2003

ABSTRACT

An empirical model that allows for the endogeneity of growth, multinational activity and wages is developed that permits for the decomposition of the impact of infrastructure into direct and indirect general equilibrium effects. It is found that, like previous studies, schools and telecommunications have a positive and significant direct contribution to domestic growth and there are greater marginal returns for countries with higher investment levels in schools and telecommunications; a result that is suggestive of a critical mass story. However, once spurious correlaton of firm location and the indirect effects through wages and multinational activity are accounted for, the total effects of telecommunications and schools on growth are lower than direct estimates would suggest.

JEL classification: F2; O4; H4
Keywords: Infrastructure; Growth; Multinational Corporations; Development

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