Comment

2668-09_Comment_Keane.qxd 04/14/05 09:15 Page 179CommentMICHAEL P. KEANEAny attempt to infer the effect of foreign direct investment (FDI) on theproductivity of domestic firms must first confront a number of severeeconometric challenges. I believe these challenges are so great that the lit-erature has barely begun to tackle them. In particular, the econometricspecifications estimated in the current literature do not seem to be closelytied to any underlying economic theory that specifies the mechanismsthrough which productivity spillovers might operate. Given the severeeconometric problems this literature must confront, I expect that progresswill require econometric modeling based rather tightly on maintained eco-nomic theory. Any inferences so obtained will then be dependent on stronga priori identifying assumptions regarding economic structure.Of course, this situation is not unique to identifying FDI spillover effects.We always need a priori identifying assumptions in order to learn anythingof interest from data, beyond perhaps the simplest of descriptive statistics.Data cannot simply “speak” and answer our questions about interestingaspects of economic behavior without our bringing some a priori informa-1tion to bear. However, I think the need for more a priori structure if we areMichael P. Keane is professor of economics in the Department of Economics at Yale University.1. By “data” I mean the joint distribution of observed variables. To use the ...