Trade Policy, Foreign Direct Investment, and Convergence

This paper examines the hypothesis that countries which pursue export-promoting (EP) policies are much more likely to converge than countries which pursue import-substituting (IS) policies. The hypothesis is tested statistically in the context of a sample of developing countries which have in the recent past pursued inward-looking or outward-looking or export-promotion (EP) policies. The empirical eviddence supports the hypothesis EP countries converge at approximately 1.9% per annum, while IS countries converge at approximately 0.9% per annum.