Technology Gap and the Effect of Foreign Direct Investment on Total Factor Productivity (Case Study: Iran’s Industry)

If the technology gap between counties is narrow, the foreign direct investment (FDI) will have a ‎greater impact on total factor productivity (TFP) because of technological spillovers. In this ‎study, regarding the technology gap, the impact of FDI from nine selected OECD countries on ‎TFPs in eight industrial subsectors of Iran is examined using panel threshold model during ‎‎2002-2015. To estimate this model, at first step, a Cobb-Douglas production function was ‎estimated by ARDL approach, and TFPs were calculated. Then, technology gap as ratio of ‎foreign to domestic TFPs were computed. The estimation of panel threshold ‎model ‎indicated that if technology gap between FDI recipients and donors is narrow, the effect ‎of FDI on TFP will be high in industrial subsectors.  In addition, estimating the coefficients of ‎the variables independent of the regime indicated interesting results contrary to the theoretical ‎expectations about the productivity of the industrial sector. The human capital and R&D ‎expenditure had insignificant coefficients. These findings can be can be justified with the low ‎quality of human capital, inadequate expenditure of industrial sector on R&D activities, and ‎economic sanctions which raise the uncertainty and worsen the stagnation. Upgrading human ‎capital in the industrial sector through on-the-job training, or encouraging workers to participate ‎in overseas training courses are recommend to reduce the technological gap and to improve the attraction of FDI.‎